Year-end tax planning for 2013 will have a little more certainty, thanks to passage of the American Taxpayer Relief Act of 2012 (ATRA12). Tax brackets have been made permanent, but ATRA12 added a new top income tax bracket of 39.6% for higher-income taxpayers. The tax brackets for 2013 are 10, 15, 25, 28, 33, 35, and 39.6% (and are fixed, unless a new tax law is passed).
ATRA12 also brought welcome relief from the constant uncertainty over the alternative minimum tax (AMT). Ever since the Economic Growth and Tax Relief Reconciliation Act of 2001 increased the AMT exemption amounts for 2001–2004, Congress had to pass patches to prevent the AMT from pinching middle income taxpayers. ATRA12 permanently increased the exemption amounts and indexed future exemptions to inflation.
Unfortunately, ATRA12 did not eliminate all the temporary tax provisions. The state and local sales tax deduction, the higher education tuition deduction, and the qualified charitable distribution from IRAs, are a few of the provisions set to expire at the end of 2013. Year-end tax planning should consider the use of these provisions and how to maximize their benefit in the event they are not reinstated in future years.
Another important change this year was brought about by the Supreme Court’s decision on the Defense of Marriage Act. This decision potentially provides the opportunity for married same-sex couples to file as married. Upper income couples will want to consider carefully before deciding to file jointly.
The Patient Protection and Affordable Care Act of 2010 (also known as Obamacare) made an important change to itemized deductions in 2013. Taxpayers who itemize with large medical expenses will see a significant reduction, unless they are age 65 or older. The threshold on deductible medical expenses is 10% of adjusted gross income in 2013. It remains at 7 ½% for taxpayers 65 or older until 2017.