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2013 Taxes and the Fiscal Cliff

Posted by Anton Ewing Posted on Jan 26 2013

Dividends will not be taxed as ordinary income.  While that is a huge relief for top earners, their dividends and long-term capital gains will still be taxed more in 2013. Here are the newly adjusted tax rates on both of these forms of investment income.


10% & 15% brackets                                        0%


25%, 28%, 33% & 35% brackets                     15%


39.6% bracket                                                 20%



Estate taxes top out at 40% with a $5.25 million individual exemption.


The less-publicized news: the individual exemption is still portable.


Congress gave families a great estate planning break in the fiscal cliff deal. The portable individual estate tax exemption is no longer a temporary thing; it has been made permanent. This means that an unused portion of a $5.25 million individual exemption may be transferred to the surviving spouse at the death of the first deceased spouse.


You may have read earlier that the individual exemption would be set at $5 million this year. The estate tax exemption is subject to indexing for inflation, and in the fiscal cliff bill, Congress chose to keep and continue the indexing off of the $5 million base from 2011. Thus, we have the $5.25 million exemption amount.

Also, the estate and gift tax remain unified; if you choose, you can use up the whole $5.25 million individual exemption on gifts made during your lifetime.




Upper-income Americans face two healthcare surtaxes in 2013.


Should your modified adjusted gross income (MAGI) exceed certain thresholds in 2013, you will contend with a new Medicare surtax and an increase in any Medicare payroll tax you pay (which is actually a form of withholding).


* A 3.8% Medicare surtax will be levied on the lesser of either a) net investment income or b) the amount of MAGI exceeding $200,000 for single filers, $250,000 for couples filing jointly, and $125,000 for spouses filing separately.


* While all wage earners routinely pay a 1.45% Medicare payroll tax on earned income, the Medicare payroll tax rises 0.9% for employees after their MAGI exceed the $200,000 individual threshold this year. Your employer will deduct 1.45% in Medicare payroll taxes from your paycheck up until that threshold, and 0.9% more from your paycheck once your wages surpass it.


If you are married and file jointly, this could get complicated. While your individual MAGI may be $200,000 or less (and therefore below the individual threshold), your joint MAGI might top the applicable $250,000 threshold and that could make the 0.9% surtax kick in.


In regard to these thresholds, remember that the definition of MAGI encompasses many different forms of income: your salary, your adjusted gross income (AGI), RMDs from a 401(k), 403(b) or traditional IRA, ?unearned? net investment income (such as net capital gains from the sale of real estate or passive income from a partnership), and any foreign wages eligible for the foreign earned income exclusion.



The AMT has been permanently patched.


The Alternative Minimum Tax has at last been indexed to inflation due to the American Taxpayer Relief Act of 2012. The fix is retroactive to the beginning of last year, which will spare about 34 million taxpayers from the sting of the AMT as they file 2012 federal returns. The 2013 AMT exemption amounts are:


Single filers                                                                         $51,900

Married filing separately                                                     $40,400

Married filing jointly/qualifying widower                              $80,800

Future AMT exemption amounts will be higher, of course.



 Phase-outs of itemized deductions & personal exemptions are back.


The Pease limitation and the personal exemption phase-out (PEP) are back permanently; high-income taxpayers haven?t seen them since 2010.

For single filers, the threshold for both the PEP and the Pease limitation kicks in at $250,000 of AGI; for married joint filers, the threshold is $300,000 of AGI.

Reinstalling the Pease limitation effectively adds about 1% to the top tax rate. Under the Pease provision, taxpayers with AGI surpassing the above thresholds lose 3 cents of itemized deductions for every dollar of income that exceeds them. So if a single CEO should earn $400,000 in 2013, that CEO?s itemized deductions will be reduced by $4,500 this year (3% of the $150,000 of income above the $250,000 phase-out start). For the record, the phase-out is limited to 80% of deductions (a detail irrelevant for almost all taxpayers).

The personal exemption phase-out (PEP) reduces in the value of the personal exemption for taxpayers above certain income thresholds. (Last year, the personal exemption was $3,800 for most taxpayers.) This year, the PEP will phase out totally at about $420,000 of AGI for married joint filers.



Bonus depreciation is still around for 2013.


The Section 179 deduction amount has also increased.

In 2012, businesses could deduct as much as 50% of the cost of their investments in so-called ?qualified property? placed into service. ?Qualified property? does not include real estate, but it does encompass many forms of new business equipment. (Only new property is eligible for bonus depreciation.) In 2013, businesses can again write off such investments at this accelerated rate thanks to the fiscal cliff bill passed at the start of the year. This may or may not apply in 2014.

The bill also raised the maximum Section 179 deduction amount to $500,000 for both the 2012 and 2013 tax years, with the dollar-for-dollar phase-out kicking in above $2 million