Buckle up for tax season

Take stock of tax year 2013’s new and changed provisions, including several for higher-income taxpayers. For the second year in a row, practitioners will experience a less-than-flying start to tax season. As this article went to press, tax season was expected to begin between Jan. 28 and Feb. 4, a result of the 16-day partial government shutdown in October, although the IRS was hoping to minimize the delay. CPA return preparers, in turn, might encounter snags as they grapple with a number of new or changed provisions. This summary intended to highlight new or notable provisions. INDIVIDUAL PROVISIONS ATRA introduced, or reintroduced, several basic provisions starting in 2013, mostly affecting higher-income taxpayers. New top ordinary income tax rate. A top rate of 39.6% applies to taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately). The last time the income tax brackets had a 39.6% marginal rate on individuals was in 2000. Itemized deductions limitation and personal exemptions phaseout. The itemized deductions limitation and personal exemptions phaseout (PEP) have been reinstated. If a taxpayer’s adjusted gross income (AGI) exceeds an applicable amount based on his or her filing status, the taxpayer’s allowed itemized deductions will be limited. The applicable amounts for 2013 are $250,000 for single taxpayers, $275,000 for heads of household, $300,000 for married taxpayers filing jointly, and $150,000 for married taxpayers filing separately. The itemized deductions limitation, also known as the Pease limitation, is a 3%/80% formula, under which itemized deductions are reduced by the lesser of 3% of the excess of AGI over the applicable amount above or 80% of the amount of the itemized deductions otherwise allowable for the tax year. (The limitation had been eliminated for 2010 through 2012.) Under PEP, a taxpayer’s personal exemptions are reduced by 2% for every $2,500 (or fractional amount) (or $1,250 for married taxpayers filing separately) by which AGI exceeds the applicable amounts above (Sec. 151(d)(3), as amended by ATRA). Like the Pease limitation, the PEP didn’t apply for tax years 2010 through 2012. Alternative minimum tax. Beginning in 2013, ATRA permanently indexed for inflation the alternative minimum tax (AMT) exemption amount and the thresholds for the 28% AMT rate for individuals and made the AMT offset for nonrefundable credits permanent. The increase for inflation of the AMT exemption amounts for individuals had often been late-enacted relief in years past. For 2013, the exemption amounts are $80,800 for married taxpayers filing jointly, $40,400 for married taxpayers filing separately, and $51,900 for single filers. The inflation-adjusted threshold for the 28% AMT rate is $179,500 for married taxpayers filing jointly and unmarried individuals (other than surviving spouses) and $89,750 for married taxpayers filing separately. Capital gains and qualified dividends. A 20% rate applies to individuals' long-term capital gains and qualified dividends that would otherwise be taxed at the 39.6% rate; the former top rate of 15% applies to long-term capital gains and qualified dividends that would otherwise be taxed at a rate at or above 25% but below 39.6%. The zero rate continues to apply to long-term capital gains and dividends that would otherwise be taxed at the 10% or 15% rates. Unrecaptured Sec. 1250 gains continue to be taxed at a maximum 25% rate, and collectibles gains and gains on the sale of qualified small business stock held more than five years continue to be taxed at a maximum 28% rate. Need more info? Give us a call at 208-733-7444!