New 2013 Individual Income Tax Rates
Kelly Huang, MST CPA
With the 2013 individual income tax return filing season rapidly approaching, we feel it is a good time to remind you of the impact of prior year legislation, which is now effective in 2013, will have on your 2013 federal income tax liability (Patient Protection and Affordable Care Act of 2010 and the American Taxpayer Relief Act of 2012).
Highlights of the tax provisions taking effect in 2013 include the following:
- A new top income tax rate of 39.6 percent and a new rate on capital gains and qualified dividends of 20 percent will apply to high-income individuals (Single taxpayers whose taxable income exceeds $400,000 and married taxpayers who file a joint return and whose taxable income exceeds $450,000).
- Single individuals whose adjusted gross income (“AGI”) exceeds $250,000 and married individuals whose adjusted gross income (“AGI”) exceeds $300,000 will face a reduction in the amount of allowable itemized deductions by the lesser of: (1) three percent of the excess of the taxpayer’s AGI over the applicable threshold amount, or (2) 80 percent of allowable itemized deductions reduced by the deductions for medical expenses, investment interest, casualty and theft losses and wagering losses.
- Single individuals whose adjusted gross income (“AGI”) exceeds $250,000 and married individuals whose adjusted gross income (“AGI”) exceeds $300,000 will also face a phase-out of their ability to deduct their personal and dependent exemptions.
- Increased Medicare contribution taxes of 0.9 percent on earned income, as well as the 3.8 percent surcharge on net investment income came into effect in 2013.
. Below we have included two examples of typical high income taxpayers to illustrate how the new tax provisions will affect his/her 2013 federal income tax liability. In each example, we have done a side by side comparison, keeping 2012 and 2013 income items the same to better highlight the impact of the new tax provisions. Comparing the two examples we see that as income rises, the relative tax burden in comparison to 2012 increases (23.6% tax increase in Example #2 verses a 16.3% tax increase in Example #1). This is because a greater portion of the taxpayer’s income ($586,100 in Example #2 as opposed to $164,800 in Example #1) is now subject to the new 39.6% highest tax bracket, which is the only tax bracket having a rate increase for 2013. Also contributing to the relative increase in tax burden in Example #2 is the fact that substantially more net investment income is subject to the 3.8% Medicare contribution tax than in Example #1. The Medicare contribution tax did not apply in 2012. If you would like a better understanding of the impact of the newly effective legislation as it relates to you, please feel free to contact us.