2013 Tax Brackets and Other Tax Changes

The following is a brief discussion of some of the more noticeable tax changes between 2012 and 2013. To be clear, it is not meant to be a comprehensive list.

Tax Bracket Changes

As a result of the American Taxpayer Relief Act of 2012, the tax brackets for 2013 are the same as the 2012 brackets (after adjusting each threshold amount for 2.57% annual inflation), with one exception: There is a new 39.6% tax bracket for people with taxable incomes in excess of $400,000 ($450,000 if married filing jointly, $425,000 if filing as head of household).

Single 2013 Tax Brackets

Married Filing Jointly 2013 Tax Brackets

Head of Household 2013 Tax Brackets

Married Filing Separately 2013 Tax Brackets

Also of note is that this new tax bracket structure is “permanent.” Not permanent in the sense that it cannot be changed — because it surely will be changed at some point. But permanent in the sense that there is no specific point in the future at which changes are scheduled to take place.

Standard Deduction and Personal Exemption Amounts

The standard deduction and personal exemption amounts are the same as from 2012, after adjusting for inflation and doing the necessary rounding:

• Personal exemption: $3,900
• Standard deduction (single): $6,100
• Standard deduction (married filing jointly): $12,200
• Standard deduction (head of household): $8,950
• Standard deduction (married filing separately): $6,100

The additional standard deduction for people who have reached age 65 (or who are blind) is indexed to inflation as well, which means it increases to $1,200 for married taxpayers or $1,500 for unmarried taxpayers.

Personal Exemption and Itemized Deduction Phaseouts

One big change from recent years is that personal and dependent exemptions now phase out via the “PEP” rules (Personal Exemption Phaseout). The total personal exemptions to which you’re entitled will be reduced by 2% of the amount by which your adjusted gross income (note: not taxable income) exceeds a certain threshold amount:

• $250,000 for single taxpayers,
• $300,000 for married taxpayers filing jointly,
• $275,000 for taxpayers filing as head of household, and
• $150,000 for married taxpayers filing separately.

In addition, the amount of itemized deductions otherwise allowable is reduced by 3% of the amount by which your adjusted gross income exceeds these same threshold amounts. (Exception: Your itemized deductions cannot be reduced by more than 80% by this rule.)

The takeaway here is that there’s now an income range (starting at the applicable threshold amount) in which your marginal tax rate will be somewhat greater than the actual tax bracket you’re in.

• The phaseout of personal exemptions increases your marginal tax rate by 0.66% for each personal/dependent exemption claimed on your tax return, and
• The itemized deduction limitation effectively increases your marginal tax rate by 1%.

Estate Tax

The new law makes the 2012 estate tax exemption ($5,120,000) permanent and indexes it to inflation (making it $5,250,000 for 2013). In addition, the exemption is now permanently “portable” meaning that the estate of a deceased person can make an election to allow that person’s surviving spouse to use any portion of the exemption that was not used by the deceased spouse.

In other words, with effective exemptions above $5 million for single taxpayers and $10 million for married taxpayers filing jointly, very few people will need to be concerned with the estate tax going forward.

AMT Exemption Now Inflation-Adjusted

The new law retroactively sets the AMT exemption amount for 2012 at $50,600 for single taxpayers and $78,750 for married taxpayers filing jointly. In addition, the exemption amount is now permanently indexed to inflation so that it will no longer require annual “patch” legislation. For 2013, the exemption amounts are $51,900 for single taxpayers and $80,800 for married taxpayers filing jointly.

Changes in Payroll Tax Rates

One tax cut that the new law did not extend was the 2% reduction in payroll taxes (specifically, the employee portion of Social Security taxes) that had been in place for 2011 and 2012. As a result, employees will see their Social Security tax increase from 4.2% to 6.2%, and self-employed taxpayers will see their self-employment tax increase from 13.3% to 15.3%.

In addition, the new 0.9% Medicare tax on earned income in excess of $200,000 ($250,000 if married filing jointly) that was created by the Affordable Care Act of 2010 goes into effect starting in 2013.

Overall Effect

In short, for most taxpayers (i.e., those with gross income below $200,000), 2013 will look much like 2012 as far as tax planning strategies. For higher income taxpayers, however, there’s a whole list of new tax planning considerations:

• A 39.6% tax bracket,
• The 20% tax rate for qualified dividends and long-term capital gains (discussed in Monday’s article),
• The 3.8% Medicare surtax on net investment income (also discussed in Monday’s article),
• The 0.9% Medicare tax on earned income, and
• The personal exemption phaseout and itemized deduction limitation.