Tax Law Changes Effective January 1, 2013

By Brian Gourlay, CPA, Partner

bgourlay@srgcpas.com

Now that Congress has made up its mind, we can provide a summary of the tax rules that will be in effect for 2013.  We’ll start with the bad news: a summary of the increase in tax rates (Federal and California), broken down by income levels.  Following that is the good news: some tax benefits have been extended.

All income levels

  • The social security portion of FICA taxes is increasing by 2% on all earned income.  The maximum income subject to social security taxes in 2013 is $113,700.
  • The California sales tax is increased by .25%

Incomes over $200,000 ($250,000 if married filing jointly)

In addition to the increase in social security taxes above:

  • Investment income is now subject to both the income tax and a new Medicare tax of 3.8%.
  • Earned income is subject to a higher Medicare tax rate – increased by .9%.  Note that while the social security portion of FICA caps out at $113,700, the Medicare portion is unlimited.

Incomes over $250,000 ($275,000 if head of household, $300,000 if married filing joint)

In addition to all the increases discussed above:

  • Itemized deductions will be reduced by 3% of the amount your gross income exceeds the above threshold amounts.
  • Personal exemptions will be phased out at the rate of 2% for each $2,500 (or portion thereof) your gross income exceeds the above threshold amounts.
  • The California marginal tax rate increases from 9.3% to 10.3% (this occurs at $340,000 if head of household, $500,000 if married filing jointly)

Incomes over $300,000 ($408,000 if head of household, $600,000 if married filing jointly)

In addition to all the increases discussed above:

  • The California marginal tax rate increases to 11.3%

Incomes over $400,000 ($450,000 if married filing joint)

In addition to all the increases above:

  • The federal marginal tax rate on ordinary income increases from 35% to 39.6%
  • The federal tax rate on capital gain income (including dividends) increases from 15% to 20%  (California taxes capital gains at ordinary income rates)

Incomes over $500,000 ($680,000 if head of household, $1,000,000 if married filing jointly)

In addition to all the increases discussed above:

  • The California marginal tax rate increases to 12.3%

Incomes over $1,000,000

In addition to all the increases discussed above:

  • The California marginal tax rate increases to 13.3%

 

On the brighter side

The estate and gift tax exemption will remain at $5,000,000 (plus inflation adjustments, which brought the exemption to $5,120,000 in 2012).  However, the estate tax rate is increasing from 35% to 40%.

The following tax provisions have been extended

  • Research and Development (R&D) credit
  • 50% bonus depreciation (federal only, California does not conform)
  • Higher Section 179 expense election amounts – $500,000 in 2012 and 2013 (federal only, the California limit is $25,000)
  • Higher alternative minimum tax (AMT) exemption amounts
  • Qualifying dividends remain eligible for capital gains tax rates (note that such income is now subject to a new 3.8% Medicare tax if your income exceeds certain levels)

This is just a brief summary of the high (and low) lights of the tax rules in effect as of January 1, 2013.  There are many other rules, including some tax benefits that are only available to specific industries and individuals.  Please contact our office at 818-995-0090 or send me an email at bgourlay@srgcpas.com  regarding your particular circumstances.

January 2, 2013 Posted in News, Tax