Balancing on the "Cliff"

By: Thomas R. Tartaglia, CPA (Jan, 2013)

Now that the dust has settled and we have avoided the "Fiscal Tax Cliff", we can catch our breath and look at how some of these tax changes will affect us. The IRS has issued current tax data schedules, which incorporate the changes enacted on January 1, 2013 and the 2013 inflation-adjusted figures.

You may be asking how do the inflation adjustments work?

The point at which each of the tax brackets begins is increased for inflation. This means that, in 2012 and 2013, more income will be taxed at the 10%, 15%, 25%, 28%, 33% and 35% rates than in the previous year. There are numerous other income tax items that are adjusted for inflation including, for example, the standard deduction and the personal exemption amount. In 2012, the personal exemption amount was $3,800 (up from $3,700 in 2011). The basic standard deduction for a married couple filing jointly is $11,900 in 2012 (up from $11,600 in 2011). Standard deductions for single taxpayers and other filers are also adjusted for 2012 and 2013. As a result of the inflation adjustments to the tax brackets, exemption amount, and standard deduction amounts, many taxpayers can receive a modest increase in income without being pushed into a higher tax bracket. Not all items that qualify for an inflation adjustment get increased though. The way in which adjustments are made varies for different items based on different rounding mechanisms. Many adjustments are rounded down, which could result in no increase for a particular year.

Let's take a look at a two-wage-earner couple with two children. For 2011, they have gross income of $120,800, $30,000 of itemized deductions, and taxable income of $76,000, after taking into account their four $3,700 (for 2011) personal exemptions. Their tax (before any allowable credits) for 2011 comes to $11,250. If their income stays at exactly the same level for 2012, their taxable income will drop to $75,600 (taking into account the four $3,800 personal exemptions), and their tax will go down to $10,960, for a savings of $290.  In 2013, the savings will be an additional $300 assuming their income remains at the 2011 level.

Not all taxpayers benefit from the inflation adjustment. The Alternative Minimum Tax (AMT) can rob individuals of the benefit because the AMT traditionally has not been adjusted for inflation.  However, the American Taxpayer Relief Act (ATRA) of 2012 has permanently fixed this problem. The AMT exemption amount for tax year 2013 is $51,900 for single taxpayers ($80,800, for married couples filing jointly). The 2012 exemption amount was $50,600 ($78,750 for married couples filing jointly).

The following tax tables have been revised for 2013 in accordance with ATRA:

Married Individuals Filing Joint Returns and Surviving Spouses
If Taxable Income Is:

The Tax Is:

Not over $17,850

10% of the taxable income

Over $17,850 but not over $72,500

$1,785 plus 15% of the excess over $17,850

Over $72,500 but not over $146,400

$9,982.50 plus 25% of the excess over $72,500

Over $146,400 but not over $223,050

$28,457.50 plus 28% of the excess over $146,400

Over $223,050 but not over $398,350

$49,919.50 plus 33% of the excess over $223,050

Over $398,350 but not over $450,000

$107,768.50 plus 35% of the excess over $398,350

Over $450,000

$125,846 plus 39.6% of the excess over $450,000

 

Heads of Households
If Taxable Income Is:

The Tax Is:

Not over $12,750

10% of the taxable income

Over $12,750 but not over $48,600

$1,275 plus 15% of the excess over $12,750

Over $48,600 but not over $125,450

$6,652.50 plus 25% of the excess over $48,600

Over $125,450 but not over $203,150

$25,865 plus 28% of the excess over $125,450

Over $203,150 but not over $398,350

$47,621 plus 33% of the excess over $203,150

Over $398,350 not over $425,000

$112,037 plus 35% of the excess over $398,350

Over $425,000

$121,364.50 plus 39.6% of the excess over $425,000

 

Unmarried Individuals (other than Surviving Spouses and Heads of Households)
If Taxable Income Is:

The Tax Is:

Not over $8,925

10% of the taxable income

Over $8,925 but not over $36,250

$892.50 plus 15% of the excess over $8,925

Over $36,250 but not over $87,850

$4,991.25 plus 25% of the excess over $36,250

Over $87,850 but not over $183,250

$17,891.25 plus 28% of the excess over $87,850

Over $183,250 but not over $398,350

$44,603.25 plus 33% of the excess over $183,250

Over $398,350 not over $400,000

$115,586.25 plus 35% of the excess over $398,350

Over $400,000

$116,163.75 plus 39.6% of the excess over $400,000

 

Married Individuals Filing Separate Returns
If Taxable Income Is:

The Tax Is:

Not over $8,925

10% of the taxable income

Over $8,925 but not over $36,250

$892.5 plus 15% of the excess over $8,925

Over $36,250 but not over $73,200

$4,991.25 plus 25% of the excess over $36,250

Over $73,200 but not over $111,525

$14,228.75 plus 28% of the excess over $73,200

Over $111,525 but not over $199,175

$24,959.75 plus 33% of the excess over $111,525

Over $199,175 not over $225,000

$53,884.25 plus 35% of the excess over $199,175

Over $225,000

$62,923 plus 39.6% of the excess over $225,000

 

Estates and Trusts
If Taxable Income Is:

The Tax Is:

Not over $2,450

15% of the taxable income

Over $2,450 but not over $5,700

$367.50 plus 25% of the excess over $2,450

Over $5,700 but not over $8,750

$1,180 plus 28% of the excess over $5,700

Over $8,750 but not over $11,950

$2,034 plus 33% of the excess over $8,750

Over $11,950

$3,090 plus 39.6% of the excess over $11,950


Standard Deduction:
For taxable years beginning in 2013, the standard deduction amounts are as follows:

Filing Status and Code Section(§)

Standard Deduction

Married Individuals Filing Joint Returns and Surviving Spouses (§ 1(a))

$12,200
$11,900 in 2012

Heads of Households (§ 1(b))

$8,950
$8,700 in 2012

Unmarried Individuals (other than Surviving Spouses and Heads of Households) (§ 1(c))

$6,100
$5,950 in 2012

Married Individuals Filing Separate Returns (§ 1(d))

$6,100
$5,950 in 2012

Limitation on Itemized Deductions (Pease Limitation). For taxable years beginning in 2013, the phase out of certain deductions begins at "AGI" of $300,000 in the case of a joint return or a surviving spouse, $275,000 in the case of a head of household, $250,000 in the case of an individual who is not married and who is not a surviving spouse or head of household, $150,000 in the case of a married individual filing a separate return. You can potentially lose up to 80% of your mortgage interest, state and local taxes, charitable contributions and miscellaneous itemized deductions.

Personal Exemption.
(1) For taxable years beginning in 2013, the personal exemption amount is $3,900, up from $3,800 in 2012.
(2) Phase out. For taxable years beginning in 2013, the personal exemption phases out for taxpayers with the following adjusted gross income amounts:

Filing Status and Code Section(§)

AGI - Beginning of Phase out

AGI - Completed Phase out

Married Individuals Filing Joint Returns and Surviving Spouses (§ 1(a))

$300,000

$422,500

Heads of Households (§ 1(b))

$275,000

$397,500

Unmarried Individuals (other than Surviving Spouses and Heads of Households) (§ 1(c))

$250,000

$372,500

Married Individuals Filing Separate Returns (§ 1(d))

$150,000

$211,250


We are here to help you keep your "balance" and not fall off the "cliff".  We encourage you to contact your Dermody, Burke and Brown tax advisor to discuss your individual tax situation.

 

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