The American Taxpayer Relief Act passed on January 1st, narrowly avoiding the fiscal cliff and creating clearer expectations about the tax landscape in front of us. It is important to note, however, that this legislation does not rule out more comprehensive tax reform as negotiations on raising the debt ceiling take place later this year. 

While we don't want to overwhelm you with the details, we do want to give you a general sense of what this legislation will mean for your income tax bill in 2013.

Social Security Payroll Tax Reverts to 6.2% from 4.2%

Back in 2010, President Obama and Congress cut the Social Security payroll tax rate for individuals to 4.2% from 6.2% as a stimulus measure. The rate remained at 4.2% for 2011 and 2012, but has now expired. This means all taxpayers will now pay 2% more in Social Security taxes this year than they did in recent years on earned income up to $113,700.

Most Tax Cuts Extended

In 2001 and 2003, legislation passed lowering marginal tax rates for most U.S. taxpayers, reducing dividend and capital gains taxes, and enhancing a number of tax credits. The tax package passed on January 1st, 2013 extends most of these tax cuts for taxpayers with incomes lower than $400,000 (individuals) and $450,000 (married couples). Taxpayers with incomes above the thresholds listed will face a 39.6% tax rate instead of 35%, but only on income that exceeds the thresholds. Their long-term capital gains tax rate also increases, from 15% to 20%, and a new 3.8% surtax on investment income (both short-term & long-term) will be imposed on individuals making more than $200,000 and married couples making more than $250,000.

Estate Tax Exemption Increase

The estate/lifetime gift tax exemption amount (above which estate tax applies) is now set at $5.25 million per person for 2013 and will be indexed for inflation in future years. In other words, a married couple can leave/give up to $10.5 million and pay no taxes. 

Using tax management strategies to manage your investment portfolio are now even more important. One of these strategies is maximizing (when cash-flow allows) your contributions to tax-sheltered accounts such as IRAs (e.g, Traditional, SEP, SIMPLE) and employer-sponsored retirement plans (e.g., 403b, 457, 401k). Another best practice involves the placement of high year-to-year, income-producing assets (e.g., high-yield bonds, real estate, treasury inflation-protected securities) in tax-sheltered investment accounts, and managing taxable investment accounts with a focus on maximum tax efficiency. 

We hope your new year is off to a great start! Please don't hesitate to contact us if we can be of assistance. You may be interested to know that we offer a confidential Second Opinion Service at no cost. If you would like some valuable feedback on your current investment portfolio design or retirement income strategies, please give us a call or send us an email to schedule a meeting.


The E&G Team