U.S. Individual Tax Changes and Reforms
By Mucenski-Keck, Lynn | |
Proquest LLC |
Implications of the American Taxpayer Relief Act of 2012 and the Affordable Care Act of 2010
Although many taxpayers are aware of the significant individual income tax reform enacted by the American Taxpayer Relief Act of 2012 (ATRA), some might have forgotten the federal income tax impact of the Patient Protection and Affordable Care Act of 2010 (ACA), which is still being phased in. The ensuing discussion will focus on the effects of these reforms for individual taxpayers.
Background
During President
The Bush-era tax cuts were scheduled to sunset as of
In 2012,
Although the ACA was enacted on
Ordinary Income Tax Rates
For the 2012 taxable year, the maximum federal individual income tax rate on ordinary income was 35%; however, the top ordinary income tax rate was increased to 39.6% under the
Personal Exemptions and Itemized Deductions
High-income taxpayers and their advisors should not assume that the
Taxpayers' itemized deductions will also be phased out in 2013 by the amount of AGI in excess of the defined amount, multiplied by 3%; however, the entire phaseout cannot exceed 80% of otherwise allowable itemized deductions. Itemized deductions related to medical expenses, investment interest, or casualty and theft losses are excluded from this limitation. For example, if two taxpayers who are married filing jointly have an AGI of
Investment Income
The most misunderstood modification to individual federal income tax is related to the taxation of investment income. Not only did the
Under prior law, certain investment income was taxed at preferential rates. Gains derived from selling stocks or bonds held for longer than one year (i.e., longterm capital gain income) were not subject to ordinary income tax rates, but were instead taxed at a 0% or 15% rate. In addition, certain dividend income-generally dividends received from a domestic corporation and where the stock had been held for a certain period of time-was also taxed at the reduced capital gains rates. For individuals with an ordinary marginal tax rate of 15% or less, the capital gains tax rate was 0%, whereas individuals with a marginal tax rate above 15% were subject to a capital gains tax rate of 15%. The
The change in taxation of investment income is affected by the ACA (Internal Revenue Code [IRC] section 1411). In general, an additional tax of 3.8% will apply to investment income if a taxpayer's AGI is greater than
It is important to note that although investment income is generally defined as long-term capital gains income and qualified dividend income, the ACA provides a much broader definition, which includes interest, annuities, dividends, royalties, and rents that are not derived from the ordinary course of trade or business. In addition, net investment income includes gross income derived from a trade or business that is characterized as passive in nature.
The combination of both the
* 0% for taxpayers with a 10% or 15% marginal income tax rate
* 15% for taxpayers with a marginal tax rate above 15% but below 39.6%, with AGI less than
* 18.8% (15% + 3.8%) for taxpayers with a marginal tax rate above 15% but below 39.6%, with an AGI above
* 23.8% (20% + 3.8%) for taxpayers with a marginal tax rate of 39.6%.
For example, consider two taxpayers who are married filing jointly and have taxable income greater than
Payroll Tax
The decision to not extend the payroll tax holiday resulted in the
The decision not to extend the payroll tax holiday has had a significant impact on individual taxpayers' after-tax pay. For the 2012 tax year, the maximum amount of
In addition to the removal of the payroll tax holiday, the ACA also increased payroll taxes on wages and self-employment income. If a married filing jointly return includes wages and self-employment income that exceeds
Due to the payroll tax changes initiated for the 2013 taxable year, a married filling jointly return with
Budgetary Concerns
There are differing opinions on how the
On the other hand, the president and the
Regardless of whether the
The most misunderstood modification to individual federal income tax is related to the taxation of investment income.
There are differing opinions on how the
Copyright: | (c) 2013 New York State Society of Certified Public Accountants |
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