The American Taxpayer Relief Act (“ATRA”) was enacted on January 2, 2013 to partially deal with the “fiscal cliff.” While the ATRA prevented tax increases for many taxpayers, the ATRA significantly raised taxes on higher-income individuals. Among the many provisions of ATRA, some of the highlights from an income tax perspective include:

  • Permanent extension of the Bush-era tax cuts for most taxpayers;
  • Increased marginal tax rates and capital gains rates for certain high-income taxpayers;
  • Phase-outs of itemized deductions and personal exemptions for certain high-income taxpayers;
  • Permanent patch of the AMT exemption amount;
  • Extension of a variety of individual and business tax provisions; and
  • Did not extend the payroll tax reduction.

Increased marginal tax rate for high income individuals. For married taxpayers with taxable income above $450,000 (above $400,000 or more for single filers), the ATRA permanently raised the top marginal rate on ordinary income from 35% to 39.6%. These taxable income thresholds will be indexed for inflation. For taxpayers below these income levels, the ATRA permanently extended the 10%, 15%, 25%, 28%, 33% and 35% tax brackets.

Increased tax rate on capital gains and qualified dividends for high income individuals. The tax rate for capital gains and qualified dividends was increased from 15% to 20% for married taxpayers with taxable income above $450,000 (above $400,000 for single filers). These taxable income thresholds will be indexed for inflation. For taxpayers below these income levels, the ATRA permanently extended the maximum 15% rate on capital gains and qualified dividends.

New Medicare taxes. The ATRA did not repeal or delay implementation of the new 3.8% Medicare tax imposed on net investment income or the additional 0.9% Medicare tax imposed on wages for taxpayers with AGI over $250,000 ($200,000 for single filers). See Medicare Tax On Unearned Income, below. The 3.8% Medicare tax is in addition to the tax rate for capital gains and qualified dividends.

Tax Tables for 2013. As a result of the changes to the tax rates, as well as implementation of the new Medicare contribution taxes, the tax rates for 2013 are as follows:

Click here to view table.

Deduction and Personal Exemption Limitations. Taxpayers with AGI above $300,000 (above $250,000 for single filers), will be subject to a gradual phase-out of both personal exemptions and itemized deductions. Itemized deductions will be reduced by 3% of AGI over the applicable threshold (not to exceed 80% of itemized deductions). The itemized deduction limitation does not apply to investment interest expense, casualty losses, medical expenses or gambling losses. Personal exemptions will be fully phased-out for married taxpayers with AGI of $422,500 ($372,500 for single filers).

Permanent AMT Patch. The AMT exemption amount has been permanently “patched” and will be indexed for inflation. This was the most costly of ATRA’s provisions, as it spared millions of middle income taxpayers from the AMT.

Charitable Contributions from IRA’s - Limited Window of Opportunity. ATRA extends through December 31, 2013 the provision allowing individuals age 70½ or older to make charitable donations from their IRA’s without being subject to income tax on the distributions.

No Extension of Payroll Tax Holiday. The employee share of the OASDI (Social Security) tax was reduced from 6.2% to 4.2% during 2011 and 2012. Unfortunately, this provision was not further extended by ATRA.