Congress has passed, and the President is expected to sign, a broad tax bill that follows the Bill passed by the Senate.  Here are the changes at a glance with more detail below.

Significantly, no major changes have occurred to the Estate and Gift tax laws, despite the Senate Democrats pushing for a lower exemption amount and higher top tax rate.  This means that many of the more elaborate planning done to preserve the $5 million exemption may now need to be reviewed in light of the reduced risk of taxation and in respect to the emotional, social and financial costs to clients these tactics will incur.

Tax Law

2012

2013

Top Income tax rate

35%

39.60%

Top Tax Bracket

 $388,350

$400,000

Social Security Tax

4.20%

6.20%

AMT exemption

Temporary

Permanent

Dividend and interest income tax rate

15%

20%

Personal Exemption Phase-out

Suspended

Applies

Pease Limitation of Deductions

Suspended

Applies

Top Gift and Estate Tax Rate

35%

40%

Unified Credit Amount

$5,100,000

$5,100,000

Business Tax Credits

Ended 12/31/2012

Ends 12/31/2013

College Tuition Credit

Ended 12/31/2012

Ends 12/31/2013

Earned Income Credit

Ended 12/31/2012

Ends 12/31/2013

Child Tax Credit

Ended 12/31/2012

Ends 12/31/2013

“Doc Fix” to Medicare

Ended 12/31/2012

Ends 12/31/2013

Long Term Unemployment

Ended 12/31/2012

Ends 12/31/2013

  • The income tax rate increases to 39.6% (up from 35%) for individuals making more than $400,000 a year ($450,000 for joint filers; $425,000 for heads of household);
  • The two-percentage-point reduction in payroll taxes for Old Age, Survivors and Disability Insurance (OASDI) tax, commonly known as the Social Security tax, will be allowed to expire;
  • The higher exemption amounts for alternative minimum tax (AMT)—the so-called “patch”—are made permanent, resulting an estimated 30 million taxpayers escaping being subject to the AMT;
  • Dividends and capital gains are taxed at 20% (up from 15%) for individuals making at least $400,000 ($450,000 for joint returns);
  • The Personal Exemption Phase-out (PEP), which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Under the phase-out, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold;
  • The “Pease“ limitation on deductions, which had previously been suspended, is reinstated with a threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Thus, for taxpayers subject to the “Pease” limitation, the total amount of their itemized deductions is reduced by 3% of the amount by which the taxpayer’s AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions;
  • For estate, gift, and generation-skipping transfer (GST) tax purposes, for individuals dying and gifts made after 2012, there is a $5 million exemption (adjusted for inflation), and the top estate, gift and GST rate is permanently increased from 35% to 40%;
  • Tax credits for businesses, including the Code Sec. 41 research credit and the Code Sec. 199 domestic production activities deduction, are generally extended through the end of 2013;
  • A number of individual tax provisions have been retroactively extended through 2013. In addition, there is a five-year extension of credits that were enhanced as part of the stimulus, including the college tuition credit, the Code Sec. 32 earned income tax credit, and the Code Sec. 24 child tax credit;

Other non-tax provisions in the bill include a “doc fix,” which stops a 27% reduction in payments to Medicare doctors scheduled to go into effect; spending cuts as offsets accomplish this. Unemployment benefits, which were set to expire at the end of 2012, are extended for the long-term unemployed through the end of 2013.

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