Federal Taxes - American Taxpayer Relief Act of 2012 (ATRA)

GMT Client Alert Series - 2013/01




Jan 21, 2013

The House and Senate have recently passed the American Tax Relief Act which was signed by President Obama on January 2, 2013. Beginning in tax year 2013 taxable income above $400,000 (single filing), $425,000 (head of household), and $450,000 (married filing jointly) will now be taxed at 39.6% (up from 35% in 2012). The Act extends the income tax rates in effect in 2012 up through the 35% tax bracket.

A few highlighted 2013 changes:

  • AMT patch permanently increased for inflation. Assignees with incentive stock options need to pay particular attention to the AMT impact of ISO exercises.
  • The 2% reduction of employee social security tax rate was not extended for 2013; therefore, employees will again pay 6.2% towards FICA during 2013, up to the threshold max of $113,700.
  • There's also a 0.9% Employee-Only Medicare tax increase starting in 2013 on single incomes above $200,000 and married couples with income above $250,000. Dual income families will need to be aware of potentional under withholding during the year.
  • Capital gains and dividends tax rates will be extended. For taxpayers subject to the 39.6% bracket, the tax rates will rise for dividends and capital gains from 15% to 20% and will be inflation adjusted after 2013 (this is in addition to the 2010 Health Care Law's 3.8% Medicare Net Investment Income Tax on single incomes above $200,000 and married couples with income above $250,000).
  • A 3% phase-out of personal exemptions and itemized deductions are reinstated for taxpayers with adjusted gross income over $250,000 (single filers) and $300,000 (married filing joint filers).
  • 401k contribution max for 2013 is $17,500 and for those born before 1964, the max is $23,000.
  • US taxpayers working abroad now can exclude up to $97,600 per year for 2013 plus potentially a portion of their housing costs.
  • Estate tax relief - $5.25 million estate tax exemption adjusted for inflation with a maximum estate tax rate of 40% effective for estates of individuals deceased after December 31, 2012.
  • Conversion of non-Roth retirement accounts to Roth retirement accounts - the amounts converted will become taxable immediately.

Additional temporary extensions:

  • For 1 year: Cancellation of debt for a maximum of $2 million on a qualified principal residence can be excluded from gross income.
  • For 2 years: Tuition and fees deduction, deduction for state and local general sales tax (Schedule A); tax-free rollovers of up to $100,000 from IRA's to qualified charitable organizations for taxpayers age 70 ½ or older; qualified mortgage insurance premiums deductible as home mortgage interest (Schedule A); qualified employer provided mass transit passes excluded from employees' gross income; non-business qualified energy efficient home improvements for a $500 maximum lifetime credit.
  • For 5 years: American opportunity Hope credit for a maximum of $2,500 for the first four years of higher education.

Our recommendations: 

  • Communicate this information to your assignees as it may affect their tax on investment planning and quarterly tax estimates.
  • Consider updating any 2013 hypothetical tax calculations, tax cost projections, and net pay calculations in order to align them to the new changes.
  • Company tax accruals should be adjusted to reflect any of these changes, especially for highly-compensated employees.

Should you need any immediate assistance regarding the above, please do not hesitate to contact us. We are ready to help!

 

Sincerely,

Your Global Mobility Tax Team