This is Part 2 of the American Taxpayer Relief Act summary. To read Part 1, click here. The majority of this summary deals with the capital gains tax rates, the payroll tax cut and charitable distributions of your IRA.
Capital gains and qualified dividends rates. The new law retains the 0% tax rate on long-term capital gains and qualified dividends, modifies the 15% rate, and establishes a new 20% rate. Beginning in 2013, the rate will be 0% if income falls below the 25% tax bracket; 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate; and 20% if income falls in the 39.6% tax bracket. It should be noted that the 20% top rate does not include the new 3.8% surtax on investment-type income and gains for tax years beginning after 2012, which applies on investment income above $200,000 (single) and $250,000 (joint filers) in adjusted gross income. So actually, the top rate for capital gains and dividends beginning in 2013 will be 23.8% if income falls in the 39.6% tax bracket. For lower income levels, the tax will be 0%, 15%, or 18.8%.
Payroll tax cut is no more. The 2% payroll tax cut was allowed to expire at the end of 2012. The expiring tax holiday for payroll taxes was not addressed, meaning that the reduced 4.2% tax rate for the employees’ portion of the Social Security payroll tax has expired and the rate has returned to 6.2%. This will be a 2% tax rate increase that employees will immediately see on their paychecks.
Extension of the IRA Charitable Rollover. In the American Taxpayer Relief Act of 2012, the IRA charitable rollover provision has been extended until Dec. 31, 2013. The IRA charitable rollover provision allows tax-free distributions to eligible charities from an IRA held by someone age 70 or older, of up to $100,000 per taxpayer per year. The extension is retroactive to Jan. 1, 2012 and allows donors to make distributions directly to eligible charities before Feb. 1, 2013 and elect to have such distributions treated as qualified charitable distributions in 2012. Previous legislation allowing IRA charitable rollover gifts expired on Jan. 1, 2012.
I hope this information is helpful in helping you to understand the law changes that will affect us in 2013. If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call our offices to schedule a free attorney consultation at 888.222.1328.
Contributed by MH Arrowhead, Prescott and Flagstaff Estate Planning Attorney and Partner David T. Eastman.
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