2012 Tax Act Impacts Higher-Income Taxpayers

On January 2, 2013, the American Taxpayer Relief Act of 2012
(the “2012 Tax AcAmerican Tax Payer Relief Act 2012t”) was signed into law. While the 2012 Tax Act did not significantly affect many taxpayers, those individuals with incomes over $400,000 and married couples filing jointly with incomes over $450,000 are now subject to a highest marginal rate of 39.6%, up from 35%.  A 20% rate now applies to long-term capital gains and dividends of these higher income taxpayers, though taxpayers with incomes below $400,000 (for individuals) and $450,000 (for married couples filing jointly) continue to be subject to 15% and 0% rates on capital gains and dividends, depending on their taxable income. Combined with the new 3.8% Medicare tax on investment income, the maximum rate on long-term capital gains and dividends can now be as high as 23.8%.

The 2012 Tax Act also reinstated the personal exemption phaseout and the so-called “Pease” limitation on itemized deductions. Generally speaking, the reinstatement of these provisions can result in increased income taxes for higher income taxpayers. The personal exemption phaseout requires higher income taxpayers to reduce the amount of personal exemptions for themselves, their spouses, and dependents. The “Pease” limitation requires higher income taxpayers to reduce itemized deductions by 3% of the amount by which a taxpayer’s adjusted gross income exceeds a threshold amount.  Both of these limitations apply to single taxpayers with incomes over $250,000 for single filers and married couples filing jointly with incomes over $300,000.  Please note that the thresholds for these deductions are lower than the thresholds for the higher income tax rates discussed above.

The 2012 Tax Act made a wide variety of other changes to federal income tax law, such as ending the “payroll tax holiday” (i.e., the temporary decrease in the Social Security tax withholding rate on worker’s salaries to 4.2% rather than the traditional – and now reinstated – 6.2%), indexing the alternative minimum tax exemption for inflation, and many others.  Please contact us if you have questions about these changes.