Volume No. 13-01

“Congress still has to deal with spending cuts.”

Over New Years, the U.S. Congress averted the fiscal cliff by reaching a bi-partisan agreement on various income and transfer tax provisions.  Congress still has to deal with spending cuts and the debt ceiling before we know how steep the “hill” will be.  The following are some of the tax changes that were made effective January 1, 2013, under the “American Taxpayer Relief Act of 2012” (the “Act”):

1. The top personal income tax rate increased from 35% to 39.6% for married taxpayers whose taxable income exceeds US$450,000 and for single taxpayers whose taxable income exceeds US$400,000.  Certain deductions and credits, however, will be limited for those couples whose income exceeds US$300,000 or US$250,000 (single taxpayers).  These taxpayers are considered high income earners under the Act.
2. The top income tax rate on qualifying dividends and long-term capital gains has increased from 15% to 20%.  For some taxpayers the Medicare surtax will increase this rate to 23.8% (see point 8 below).
3. The personal exemption phase-out has been reinstated for high income earners.
4. The claw back of itemized deductions has been reinstated for high income earners.
5. The AMT “patch” (the exemption of US$78,750 for married taxpayers and US$50,600 for single taxpayers) has been made permanent and the exemptions will now be indexed for inflation.
6. The estate, gift and generation skipping transfer tax exemptions have been made permanent at US$5,000,000 (indexed for inflation) but the tax rate has increased from 35% to 40%.
7. The Act did not extend the Social Security tax holiday so the old age security and disability insurance (“OASDI”) portion of FICA increased from 4.2% to 6.2%.
8. The Act did not incorporate the Medicare surtax under Obamacare.  Thus the highest rate of tax on qualified dividend and long-term capital gains will be 23.8% for taxpayers whose taxable income exceeds US$250,000 (married filing jointly) and US$200,000 (single taxpayers).  It should be noted that the Obamacare definition of “high income earner” is different from the definition under the Act.

The Act also contains other provisions related to subpart F income received from related parties, extension of regulated investment companies (“R.I.C.”) qualified investment entity treatment under the Foreign Investment in Real Property Tax Act, and the extension of the exemption of certain interest-related dividends and short-term capital gains dividends of R.I.C.’s.

The passage of the Act provides some fixes but much still remains to be done to provide some certainty to the U.S. economy.  Interested readers should contact their TSG advisor for more detailed information.

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TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

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TAX TIP is provided as a free service to clients and friends of Cadesky Tax.

The material provided in Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Cadesky Tax cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.