The 2010 Tax Act effectively extended the Bush tax cuts (known formally as the Economic Growth and Tax Relief Reconciliation Act of 2001) through December 31, 2012. The temporary extension has not yet led to longer-term reform. If Congress does not act before the end of the calendar year, tax laws revert back to those set by the Clinton administration, in addition to the taxes related to the Affordable Care Act .
The tables below summarize the more significant changes in income and estate tax laws assuming no further legislation between now and the end of the year.
Personal Income Taxes
|Marginal Income Tax Rates||10%, 15%, 25%, 28%, 33% & 35%||Reverts to pre-2001 marginal tax bracket rates, with the top two rates at 36% and 39.6%|
|Long-Term Capital Gains||15% (0% for taxpayers in the lowest 2 tax brackets)||Top rate reverts to 20% (10% for taxpayers in the lowest tax bracket) (Plus Investment Income Surtax)|
|Short-Term Capital Gains||Taxed at ordinary income tax rates||Taxed at ordinary income tax rates (Plus Investment Income Surtax)|
|Qualified Dividends||15% (0% for taxpayers in the lowest 2 tax brackets)||Taxed at ordinary income tax rates (Plus Investment Income Surtax)|
|Investment Income Surtax ||0%||3.8% surtax on lesser of: 1) modified adjusted gross income above $200,000 (single) or $250,000 (married); and 2) net investment income |
|Hospital Insurance Tax||0%||0.9% surtax on earned income (part of Social Security payroll tax) above $200,000 (single) or $250,000 (married) |
(Sources available on request)
 Also referred to as the “unearned income Medicare contribution” tax
 Generally, net income from interest, dividends, annuities, royalties, capital gains, certain rents, and some passive business income
 Impacts the employee portion of payroll tax only
|Estate & Gift Tax Exemptions||$5,120,000 per individual (Estate and Gift Tax exemptions are unified)||Reverts to 2001 thresholds: Gift Exemption = $1,000,000; Estate Exemption = $1,000,000|
|Top Estate & Gift Tax Rates||35%||Reverts to 55%|
(Sources available on request)
Other Notable Changes in 2013
- The itemized deduction threshold for medical expenses goes from 7.5% to 10% of Adjusted Gross Income (AGI).
- The employee portion of Social Security payroll tax reverts back to 6.2% from its temporarily reduced rate of 4.2%.
Despite the myriad of potential outcomes and the excruciating amount of uncertainty, tax planning is critical. What we know about 2012 is that tax rates are favorable: marginal rates are low from a historical perspective and 2012 is likely the last year to avoid surtaxes related to the Affordable Care Act.
Whether we do get another last minute temporary extension, the 2013 rates summarized in the tables below, or something in between, taxes are likely to trend upward in one form or another.
Below are some of the many planning considerations to review when applicable. Until finality is reached from a legislative standpoint, none of the potential strategies are without risk. All must be considered carefully based on the unique facts and circumstances applicable to each client and the risk/reward trade-off implicit in one strategy versus another.
- Converting assets to Roth IRA accounts in 2012 may potentially avoid Medicare surtaxes on the conversion. Taking this step will also reduce future surtaxes on Required Minimum Distributions (RMDs) applicable to pre-tax retirement accounts (post age 70 ½). Additionally, reducing future RMD income can potentially reduce Medicare Part B and Part D premiums for active participants in the Medicare program.
- Deferring use of capital losses until 2013 may result in the offset of capital gains subject to higher tax rates.
- Increasing salary deferrals into qualified plans post-2012 and/or increasing the allocation to tax-exempt bond securities in taxable accounts may help reduce exposure to Medicare surtaxes by lowering taxable income.
- Scheduling planned medical operations in 2012 may result in a higher tax deduction if the AGI threshold is allowed to increase in 2013 to 10%.
- For clients with large estates, utilizing the unused portion of the 2012 lifetime gift exemption of $5,120,000 (single); $10,240,000 (married) may prove to be a one-time opportunity.
In summary, regardless of what actions, or lack thereof, Congress takes in the future, we advocate pragmatic strategies that will prove effective over time irrespective of the timing and direction of events beyond our control.
Email Aaron at firstname.lastname@example.org
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