Here is a quick summary of the tax changes made effective at the beginning of the year:
• The two percentage point reduction in Social Security payroll tax was discontinued. This will probably have the widest impact as this will apply to everyone that is working.
• The exemption level for the alternative minimum tax has been made permanent and will be adjusted upward with inflation over time. Congress over the past few years would “patch” these exemptions at the last moment prior to year end.
• For those who earn over $200K if they are single and $250K if they are married will be subject to the 3.8% Medicare surtax on unearned income.
• Individuals with adjusted gross income of more than $250K and married couples with over $300K will be subject to phase outs of itemized deductions and personal exemptions. This is entirely phased out at $372,501 for individuals and $422,501 for married couples.
• Individuals with taxable income of over $400K and married couples with over $450K will be subject to the highest new tax rate established of 39.6%. Long term capital gains and qualified dividends will be taxed at 20% instead of 15% (add Medicare surcharge taxes and this increases to 23.8%).
• The $5M estate and gift tax exemption has been made permanent ($10M in total per couple), but the tax rate increases for amounts above the exemption from 35% to 40%.
There are some other smaller items that can be discussed at a later time, but these are the core changes. The biggest takeaways from this are individuals close to either the $200K or $400K threshold and couples close to the $250K or $450K level will want to intensify their tax planning to see if they can avoid these tax increases. Of course any strategies should be aligned with one’s goals, not for the sake of letting the tax tail wag the dog. The good news is that these tax codes are permanent in nature, which will help people plan for the long term without worrying about sunset clauses. The permanence of the alternative minimum tax exemption and estate tax code also takes away a great deal of uncertainty.
In the end, our tax code is still too complex and should be reformed. Although there is a sense of permanency here, just keep in mind that this can easily change when the next Presidential administration takes over in 2017.