The year began with the passage of the American Taxpayer Relief Act of 2012 (ATRA).
Top Tax-Bracket Increases
The most important result of this act was the tax increase from 35% to 39.6% for those with income over $400,000 if single and $450,000 for married taxpayers filing jointly.
Alternative Minimum Tax (AMT)
ATRA also increased the alternative minimum tax exemption amounts and, for the first time, indexed the exemption and phaseout amounts, with the result that taxpayers can avoid the annual uncertainty regarding the exemption.
Increased Capital Gains and Qualified Dividends Tax Rates
ATRA extended the favorable capital gains and dividends rates on income at or below $400,000 (individual filers), $425,000 (heads of households), and $450,000 (married filing jointly) for tax years beginning after December 31, 2012. However, for taxpayers with incomes above those thresholds, the rate for both capital gains and dividends increased to 20 percent.
New 3.8% Medicare Tax on Net Investment Income
Starting with the year 2013, individuals may be subject to the Unearned Income Medicare Contribution surtax of 3.8% on their net investment income. This surtax is also called the Net Investment Income Tax (NIIT). The tax is 3.8 percent of the lesser of two amounts:
- Net investment income, or
- the excess of the taxpayer’s modified adjusted gross income (MAGI) above $200,000 (single filer) or $250,000 (joint filer).
As a result of the Supreme Court decision in U.S. v. Windsor and a related IRS Revenue Ruling issued shortly thereafter, same-sex married couples may now file joint federal income-tax returns. The state where a couple was married rather than the state where a couple resides determines a same-sex couple’s marital status for federal tax purposes. Civil unions and registered domestic partnerships recognized under state law do not qualify
Itemized Deduction and Personal Exemption Phase-Outs
The phase-out of itemized deductions (often called the “Pease” Limitation) has returned for 2013. The Pease Limitation was temporarily suspended from 2010 to 2012 and allowed taxpayers to enjoy the full benefit of their itemized deductions, regardless of their adjusted gross income. For 2013, if taxpayers filing as married filing jointly have adjusted gross income of $300,000 or higher ($250,000 for single, $150,000 for married filing separately and $275,000 for head of household), itemized deductions will be reduced by 3% of the amount by which their adjusted gross income exceeds the thresholds. This reduction is capped at 80% of itemized deductions.