Smart Business Magazine, Feb 2013

16 Smart Business Houston February 2013 Your 2013 federal tax bill How executives will be significantly affected by the fiscal cliff tax deal Although Congress passed the last minute fiscal cliff tax deal in a seemingly haphazard way many changes in the American Taxpayer Relief Act of 2012 will have both positive and negative impacts on executives says Elizabeth Bunk partner in charge of Houston Tax and Strategic Business Services at Weaver Unlike the Congressional change two years ago the American Taxpayer Relief Act of 2012 provides permanent changes to certain tax rates and exemption levels she says Therefore we wont be in the same situation again two years from now because many of these tax changes wont expire This will allow executives to plan for their future taxes with greater confidence Smart Business spoke with Bunk about what executives need to know about their tax considerations for 2013 What is the new maximum rate Congress added a top income tax rate of 396 percent for those with an annual income of more than 400000 for single filers and more than 450000 for joint filers They also kept the same rates of 10 15 25 28 33 and 35 percent that were available in prior years Therefore executives earning above the 400000 or 450000 threshold will pay an additional 46 percent on the portion of their income that exceeds the highest bracket limit While it was widely anticipated that income tax rates on high income earners would increase in 2013 executives can at least be pleased that the final version of the act doubled the threshold amounts at which the 396 percent rate begins from the often mentioned 200000 and 250000 threshold amounts How are capital gains and dividend rates handled Following the same threshold 400000 and 450000 the capital gains and dividend rates permanently increased from 15 to 20 percent It is also important to note that higher income taxpayers will get hit by the new 38 percent surtax on investment income imposed by the Patient Protection and Affordable Care Act This surtax which applies at an income threshold of more than 200000 for single filers and more than 250000 for joint filers will bring the final tax rate on capital gains and dividends to 238 percent How will health care reform impact other income Starting in 2013 high income taxpayers will be subject to a brand new Medicare tax on their unearned income The 38 percent surcharge applied to capital gains and dividends as mentioned above is applied to other investment income as well A different set of limits 200000 for single and 250000 for those married filing jointly are the baseline for the surtax to apply Taxpayers whose adjusted gross income exceeds the threshold will be subject to this tax This surcharge combined with the increased maximum tax bracket could mean that some taxpayers are paying 434 percent on their highest levels of income What other provision is noteworthy A key provision to be aware of is the reinstatement of the phase out for itemized deductions and exemptions Itemized deductions which had avoided phase out during 2010 through 2012 will now be subject to severe limits depending on income levels Total itemized deductions in 2013 and beyond which include real estate taxes mortgage interest and charitable contributions will be reduced by 3 percent of the amount by which a taxpayers AGI exceeds a threshold of 250000 for single taxpayers and 275000 for those married and filing jointly The reduction cannot exceed 80 percent of the total deductions Whats the overall impact For many executives these provisions are probably what they anticipated There are certainly some negative changes in the act but there are at least two positive results 1 Permanent changes to tax rates including the dividend and capital gain rates 2 Applying the new top income tax rate to a threshold amount that is double what was originally predicted These positives should at least slightly raise revenue without significantly raising taxes for all Americans Our coverage of the fiscal cliff law continues next month with more insight into how these taxes will interact with those related to health care reform ELIZABETH BUNK CPA CFP Partner in charge Houston Tax and Strategic Business Services Weaver 832 320 3220 Elizabeth Bunk@ WeaverLLP com Insights Accounting is brought to you by Weaver WEBSITE For more information about the fiscal cliff laws impact to businesses and individuals see the articles on Weavers website http weaverllp com News aspx INSIGHTS ACCOUNTING