American Taxpayer Relief Act – What does it mean to you?

The American Taxpayer Relief Act passed by Congress last week had many implications for charitable giving, so we thought we’d share a summary of the changes. We hope you find this helpful for your 2013 gift planning.

The IRA Charitable Rollover
Donors age 70½ or older are once again eligible to gift up to $100,000 from their IRAs directly to qualified charities without having to pay income taxes on the money. This benefit expires on December 31, 2013. In addition, qualified distributions made by February 1, 2013, may be counted retroactively for the 2012 tax year. Also, a taxpayer who took a distribution from an IRA in December 2012 may elect to count that distribution (or a portion thereof) as a 2012 IRA charitable rollover if the individual transfers the amount in cash before February 1, 2013 to an eligible charity.

Individual income tax rates increase for “high-income households”
The new law permanently extends tax rates set by the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 for taxpayers whose taxable income is less than $400,000 a year and married couples whose taxable income is less than $450,000. It increases the tax rate for high-income households whose taxable income exceeds those thresholds to 39.6 percent. The 2013 tax rates will be 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent.

Capital gains tax rates increase for high-income households
The capital gains and dividend tax rates for high-income households will increase to 20 percent. Other capital gains and dividends tax rates remain unchanged. There is no capital gains tax for taxpayers whose income falls in tax brackets below 25 percent. The capital gains tax rate is 15 percent for taxpayers whose income falls at or above the 25 percent tax bracket but below the new 39.6 percent rate. Note that these rates apply to “qualified” dividends and long term capital gains. Other dividends and short term capital gains are taxed as ordinary income.

Estate, gift and generation-skipping tax exemptions are retained
The new law permanently preserves the current individual gift, estate and generation-skipping tax to a unified $5 million exemption level. This amount will be indexed for inflation in future years. And it would raise the top rate to 40 percent from the current 35 percent. The new law also allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse. This portability provision is also made permanent.

Itemized deductions and personal exemptions are restricted
The new law limits itemized deductions and phases out the personal exemption for individuals whose income exceeds $250,000 and for married couples whose income exceeds $300,000.

The payroll tax cut ends
The new law does not extend the 2 percent Social Security tax cut that has been in place for two years. Taxpayers will again pay a 6.2% Social Security tax on their wages. The Social Security wage base limit increases to $113,700.

Health care surtax
A new 3.8% surtax often referred to as the health care surtax begins on January 1, 2013. This tax was enacted as part of the Health Care and Education Reconciliation Act of 2010. It applies to net investment income where an individual’s modified adjusted gross income exceeds $200,000. The threshold for married couples is $250,000. The surtax applies to the lesser amount of investment income or the amount in excess of the modified adjusted gross income threshold.

An additional surtax of .9% on earned income was also included in the Health Care and Education Reconciliation Act of 2010. It applies to all earned income in excess of $200,000 for individual taxpayers and $250,000 for married couples.