In October 2012, the IRS released 2013 cost-of-living adjustments for retirement plans. But it waited to release most other amounts until the fates of many expiring (or expired) tax provisions were settled. The American Taxpayer Relief Act of 2012 (ATRA), signed into law on Jan. 2, extends or makes permanent many provisions, and the IRS has now released the remaining inflation-adjusted amounts for 2013.
Individual income taxes
Ordinary-income tax rates (except for the 15% rate) were scheduled to increase in 2013, but ATRA makes 2012 rates permanent for most taxpayers. The act brings back a marginal tax rate of 39.6% for taxpayers with taxable income that exceeds $400,000 (singles), $425,000 (heads of households), $450,000 (married filing jointly or surviving spouse) or $225,000 (married filing separately). These thresholds mean that the 35% tax brackets are very small this year, especially for singles, where there’s less than a $2,000 difference between the 35% and 39.6% bracket thresholds.
Thresholds for the 10% through 35% brackets increase for each filing status but more significantly for the higher brackets. For example, the top of the 10% bracket increases by $225 to $450, depending on filing status, but the top of the 33% bracket increases by $10,000 ($5,000 for separate filers).
The personal and dependency exemption increases by only $100, to $3,900 for 2013. Bear in mind that, beginning in 2013, the exemption returns to being subject to a phaseout.
The phaseout begins with adjusted gross income (AGI) of $250,000 (singles), $275,000 (heads of households), $300,000 (joint filers), and $150,000 (separate filers). The exemption phases out completely at $372,500 (singles), $397,500 (heads of households), $422,500 (joint filers), and $211,250 (separate filers). The phaseout reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s AGI exceeds the applicable threshold (2% of each $1,250 for separate filers).
Under ATRA, beginning in 2013, the brackets, exemptions and exemption phaseouts for the alternative minimum tax (AMT) will be indexed for inflation (starting from increased 2012 amounts set by ATRA). The exemption amounts for 2013 are $51,900 for singles and heads of households and $80,800 for joint filers, increasing by $1,300 and $2,050, respectively, over the 2012 amounts. The inflation-adjusted phaseout ranges for 2013 are $115,400–$323,000 (singles and heads of households) and $153,900–$477,100 (joint filers). (Amounts for separate filers are half of those for joint filers.)
The AMT is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.
Education- and child-related breaks
The maximum benefits of various education- and child-related breaks generally remain the same for 2013. But most of these breaks are also limited based on the taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within the applicable phaseout range are eligible for a partial break — breaks are eliminated for those whose MAGIs exceed the top of the range.
The MAGI phaseout ranges generally remain the same or increase modestly for 2013, depending on the break. For example:
The American Opportunity credit. The MAGI phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2013: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.
The Lifetime Learning credit. The MAGI phaseout ranges for this education credit (maximum $2,000 per tax return) increase for 2013; they’re $107,000–$127,000 for joint filers and $53,000–$63,000 for other filers — up $3,000 for joint filers and $1,000 for others.
The adoption credit. The MAGI phaseout ranges for this credit also increase for 2013 — by $4,870, to $194,580–$234,580 for joint, head-of-household and single filers. The maximum credit increases by $320, to $12,970 for 2013.
(Note: Married couples filing separately generally aren’t eligible for these credits.)
These are only some of the education- and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible.
Gift and estate taxes
Beginning in 2013, ATRA sets a maximum rate of 40% for gift, estate and generation-skipping transfer (GST) taxes. It also retains a $5 million unified gift and estate tax exemption and a $5 million GST tax exemption. Both exemptions are adjusted annually for inflation; for 2013 the amount is $5.25 million (up from $5.12 million for 2012). The annual gift tax exclusion increases by $1,000 to $14,000 for 2013.
Estate tax rates increase over those of 2011 and 2012 (and, in some cases, 2010), when the maximum tax rate was 35%. If Congress hadn’t passed ATRA, however, the tax increases would have been much larger: In 2013 the maximum rate would have reverted to 55% and the exemption amount would have dropped to $1 million (with no adjustment for inflation except for the GST tax).
Tax planning is a priority
With the release of the 2013 inflation-adjusted amounts and ATRA extending or making permanent numerous tax breaks, tax planning is critical. Because many provisions are subject to a variety of rules and limitations, it’s important to discuss them with your tax advisor to determine exactly how they’ll affect you. Our tax professionals can help you develop a strategy based on your specific situation and goals and keep you up to date on future tax law changes.