Recapping Federal Tax Changes in 2013

A slew of federal tax changes came into effect in 2013. Here is a recap.

New Income Tax Rates

The top tax rate of 39.6% was re-introduced in 2013 with the American Taxpayer Relief Act (ATRA). This new rate affects single filers with taxable incomes above $400,000, married joint-filing couples with taxable incomes above $450,000, and head-of-household filers with taxable income above $425,000. For everyone else, the tax brackets remain the same.

Long-Term Capital Gains and Dividends

The ATRA also raised the income tax rates on long-term capital gains and dividends from 15% to 20% for single filers with taxable incomes above $400,000, married joint-filing couples with taxable incomes above $450,000, and head-of-household filers with taxable income above $425,000. The old 0%/15% rates remained the same for everyone else.

Medicare Contribution Tax

An additional 3.8% of Medicare tax for higher-income earners — individuals who earn more than $200,000 per year, $250,000 for joint filers — enacted by the Patient Protection and Affordable Care Act, commonly known as the healthcare reform law or ObamaCare, took effect in 2013.

This surtax only applies to the lesser of net investment income or the amount of modified adjusted gross income above the threshold.

The 3.8% surtax also applies to salaries and self-employment income. Previously, the Medicare tax was a flat 2.9%, with employers and employees each responsible for 1.45% while self-employed individuals paid the entire 2.9%. From 2013 onwards, essentially, high-income earners now pay an additional 0.9% on salaries and self-employment income above the threshold.

Exemptions and Deductions Phase-Outs

High-income taxpayers will once again face reductions of their exemptions and itemized deductions based on their income levels. These Personal Exemption Phaseout (PEP) and limitation on itemized deductions were temporarily eliminated as part of the Bush era tax cuts but were re-introduced in the ATRA.

Filing Status for Same-Sex Couples

As a result of the 2013 Supreme Court decision, same-sex marriages that are recognized under state or foreign laws must now be recognized for federal tax purposes. Same-sex couples married under these laws need to file using either Married-Joint or Married-Filing-Separate status in the 2013 Federal tax returns.

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