High Net Worth Individuals and Taxpayers – How are you Impacted by the American Taxpayer Relief Act of 2012?

By Scott Aber

The United States Congress passed the American Taxpayer Relief Act of 2012 on New Year’s Day 2013 and it was signed into law and enacted by President Barack Obama on January 2nd of this year.  Initially introduced as provisions and changes to expiring “Bush Tax Cuts” which centered around the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Growth Tax Relief Act of 2003, the Act is an attempt to escape a seemingly unavoidable fiscal cliff in the United States of America.  While the Act does does little to address government spending control, it does maintain Bush tax provisions pertaining to the middle-class.  Certain compromises contained in the legislation, however, revert back to the enforcement of significantly higher pre-2001 taxes for high net worth taxpayers at upper income levels.  Is there reason to worry if you fall into a higher income level?  The answer is yes…but you need an experienced accountant and CPA who can walk you through all pertinent changes.

Scott M. Aber, CPA is an experienced accountant with over 25 years of experience serving the needs of taxpayers in New York, New Jersey and Connecticut- especially those taxpayers who have historically been classified as high net worth.  Scott M. Aber, CPA has read and reviewed the American Taxpayer Relief Act of 2012 and knows how to save you money based on some very elaborate and unfavorable tax policies put upon taxpayers in complex and out of the ordinary tax categories, such as those people earning higher incomes.  You can contact Scott M. Aber, CPA to speak with a highly skilled tax consultant who specializes in unique situations.

American Taxpayer Relief Act Overview

Indeed, there is no way to deny the apparent and substantial changes rendered by the American Taxpayer Relief Act of 2012.  While there are some areas of the Act which will benefit the population as a whole, Scott M. Aber, CPA wants to take a deeper dive into the modifications of existing laws and the introduction of new legislation.

Marginal Tax Rates

Probably the most prominent change is that, effective January 1, 2013, a new 39.6% income tax bracket has been created to group those filers who:

  • Earn more than $400,000 as a single filer

  • Earn more than $450,000 as a head of household

  • Earn more than $450,000 as part of a joint filing

  • Earn more than $225,000 as a married taxpayer filing separately

Marginal tax rates for filers at lower income levels have remained relatively unchanged.  Single filers with income between $87,850 and $183,250  will remain in the 28% tax bracket as will married and joint filers with incomes between $146,400 and $223,050.  Similarly, married joint filers earning between $223,050 and $450,000 and single filers with incomes between $183,250 to $400,000 will have a maximum marginal tax rate of 33%.

Itemized Deductions

Itemized deductions, long known as a saving grace for taxpayers who use them, are now under more scrutiny.  This is not to say that itemized deductions have disappeared but it is to say that there are now limitations imposed on these deductions for filers who:

  • Earn more than $250,000 as a single filer

  • Earn more than $275,000 as a head of household

  • Earn more than $300,000 as part of a joint filing

  • Earn more than $150,000 as a married taxpayer filing separately

Here’s how you are affected if you fall into one of these categories.  The American Taxpayer Relief Act of 2012 looks at your Adjusted Gross Income (AGI) and the amount by which it exceeds the amount outlined above, for your respective grouping.  New tax laws take 3% of this excess amount.  So, if you have an AGI of $350,000 as a single filer, your excess amount is $100,000 ($350,000 AGI less $250,000 allowed AGI is $100,000) and you must reduce your itemized deductions by $3,000 (3% of $100,000 excess AGI).  Finally, if you planned on deducting $5,000 in an itemized fashion, you would have to reduce that amount by the aforementioned $3,000 and only deduct $2,000.

Phasing Out of Personal Exemptions for High Earners

A personal exemption reduces your taxable income, just like a tax deduction, in order for you to reduce your tax obligations.  The single filer personal exemption that can be taken by a taxpayer who does not fall into fall into a category labeled as upper income is $3,900 in 2013 (as opposed to $3,800 in 2012).  For taxpayers with higher incomes to report, legislation is now in place that will eventually take away this pseudo tax-deduction for those filers who:

  • Earn more than $400,000 as a single filer

  • Earn more than $450,000 as a head of household
  • Earn more than $450,000 as part of a joint filing

  • Earn more than $225,000 as a married taxpayer filing separately

Basically, by whatever amount your AGI exceeds the allowable amount outlined above, you must divide that amount by $2,500.  That $100,000 that exceeded AGI above is divided by $2,500 for a figure of 40.  The new tax law states that this figure of 40 needs to be multiplied by 2 (for 2%) for a figure of 80 (or 80%) and the original tax deduction that you were going to take as part of the standard deduction is reduced by 80% to $780 from $3,900 for 2013.  In future years, expect this 2% and $2,500 figure to raise for an eventual and complete phase out of personal deductions for high net worth individuals.

Medicare Tax Changes

New Medicare tax legislation for high earners is especially complicated making it a necessity to work with a qualified accountant like Scott M. Aber, CPA.  A few key changes will impact those filers who:

  • Earn more than $200,000 as a single filer or head of household

  • Earn more than $250,000 as part of a joint filing

  • Earn more than $125,000 as a married taxpayer filing separately

Medicare Surtax on Investment Income

If you are an individual who falls into one of the above categories, you are now subject to an additional medicare surtax tax of 3.8% on your investment income.  Qualifying investment income includes passive income from pass-through investment vehicles, as well as interest, dividends and capital gains.  If your AGI falls into any of the above categories, you are still penalized- even if you do not have investment income- because the surtax is imposed on the lesser of excess modified AGO or net investment income.

Additional Medicare Tax on Earned Income

Another Medicare tax that is new for 2013 is that individuals falling into the Medicare tax categories above must pay an additional 0.9% in what is labeled Medicare Hospital Insurance (HI) on excess earnings.  Previously, increases in Medicare taxes had burdens that were shared by an employer but high net worth individuals are not granted that luxury with the HI tax and must assume the entire burden.

Taxes on Capital Gains and Dividends

For individuals now in the new 39.6% tax bracket, capital gain and dividend tax rates will rise indefinitely to 20%.  Taxpayers above the 15% income tax bracket will continue to pay 15% on these earnings and no tax will be imposed on those in the 10% or 15% income tax brackets who have capital gains or dividends.

Is There Any Good News?

Estate, Gift and Generation-Skipping Transfer Taxes

There are a few positive aspects concerning certain taxes.  Finally indexed for inflation, the exemption rate for estate, gift and generation-skipping taxes remains $5,000,000 for 2012 and $5,250,000 for 2013.  Also, should a spouse die prior to a second spouse, the first spouse’s unused exemptions can be transferred to the surviving spouse.  The gift exclusion amount has increased to $14,000 in 2013 from $13,000 in 2012.  However, the the American Taxpayer Relief Act of 2012 does indefinitely increase the top tax rate to 40% from 35%.

AMT Patches

Alternative Minimum Tax (AMT) relief has also been pursued and higher exemption amounts, otherwise known as “patches”, are in place as such:

  • $50,600 as a single filer or head of household

  • $78,750 as part of a joint filing
  • $39,375 as a married taxpayer filing separately

Tax Planning & How to Move Forward with Filing

The best tax planning strategy that you can follow is to enlist the assistance of a CPA to translate new and existing tax legalese into reports and filings that are accurate and actually make sense.  A good accountant and investment advisor will help you visit (or revisit) your asset and earning allocations and get you the most tax savings possible.

Scott M. Aber, CPA is here to help you through confusing and trying tax times in a struggling economy so you do not have to spend unnecessary money.  Give Scott a call at (845) 215-5969 or get in touch with Scott via his online contact form.

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