Key Tax Changes for 2013

With the "fiscal cliff" law passed, there's a long list of changes that will affect businesses and individuals in 2013. Some of them were already in place before the passage of the American Taxpayer Relief Act of 2012, signed by Barack Obama on January 2nd. Others were added -- or allowed to expire -- as we teetered on the cliff's edge. Here is a rundown of some of the key provisions you need to know.

New Taxes Not Related to the "Cliff" Before 2013, the Medicare tax on salary and net self-employment (SE) income was a flat 2.9 percent. ·    For employees,1.45 percent was withheld from their paychecks, and the other 1.45 percent was paid by the employer. ·    Self-employed individuals paid the whole 2.9 percent Medicare tax themselves as part of the self-employment (SE) tax. Things have changed. The healthcare legislation (passed in 2010) added an extra 0.9 percent Medicare tax on: ·    Salary and/or SE income above $200,000 for unmarried individuals. ·    Combined salary and/or net SE income above $250,000 for married joint-filing couples. ·    Salary and/or net SE income above $125,000 for married individuals who file separately. Employer Responsibility:  For higher-income employees, employers must withhold the new 0.9 percent Medicare tax from paychecks, starting in 2013. That will result in a maximum Medicare tax wage withholding rate of 2.35 percent (1.45 percent plus 0.9 percent) for 2013 and beyond. The maximum wage withholding rate for Social Security and Medicare taxes combined will be 8.55 percent (6.2 percent for Social Security plus 2.35 percent for Medicare) for 2013 and beyond.

Say Good-Bye to the Payroll Tax Holiday 

For two years, 2011 and 2012, taxpayers enjoyed a temporary reduction of the Social Security withholding rate on an employee's salary from the normal 6.2 to 4.2 percent. The reduction meant that, for self-employed individuals, the Social Security tax component of the self-employment tax was reduced from the normal 12.4 to 10.4 percent.

Thanks to the payroll tax holiday, in 2012, one person could save as much as $2,202 and a married couple with two incomes could save up to $4,404. Unfortunately, the new law does not extend the payroll tax cut through 2013.

Key Point: The wage base on which Social Security tax is collected rose for 2013 to $113,700 of salary. That means individuals will pay 6.2 percent on wages up to $113,700, and self-employed persons will pay 12.4 percent up to the same level.

New Tax Rates for Higher-Income Individuals

Tax on Ordinary Income: Most people will not see a federal tax rate increase for 2013. The rates will remain the same as they were in 2012: 10, 15, 25, 28, 33, and 35 percent. However, the top rate for those who earn more has increased from the previous level of 35 percent up to 39.6 percent. This change only affects:

• Single filers with taxable income of at least $400,000

• Married joint filers with taxable income of at least $450,000

• Head of household filers with taxable income of at least $425,000

• and married separate filers with taxable income of at least $225,000.

Updated tax tables were issued by the IRS following the signing of the new law, which employers need in order to calculate 2013 payrolls. These tables supersede previous tables issued by the IRS on December 31, 2012. You can view the newly revised version which contains the percentage method income tax withholding tables and related information by clicking IRS Notice 1036.

Other Important Provisions Affecting Individuals and Businesses

The American Taxpayer Relief Act includes many provisions that will change the tax landscape in 2013. Here are just a few:

• Liberalized rules for certain retirement savings plans. The new law lifts most of the previous restrictions regarding the rollover of funds from a 401(k) or similar plan into a Roth account. Participants who have 401(k) plans with in-plan Roth conversion features can now make transfers to a Roth account at anytime.

• Employer-provided parking allowance restored. For 2012, employer-provided parking allowances are tax-free up to a monthly limit of $240. For 2013, the monthly limit is $245. Thanks to the new law, businesses can allow these same amounts for 2012 and 2013 for tax-free transit passes or vanpooling. For example, your company can give each employee up to $245 per month this year to pay for the park and ride plus up to another $245 to pay for the train. Without the new law, there would have been only a $125 monthly limit on employer-provided transit passes and vanpooling for 2012 and 2013. Alternatively, your company could offer a salary reduction arrangement instead, allowing employees to set aside money pre-tax up to the same limits listed above, effectively reducing the federal income and employment taxes they pay.

• The Research Tax Credit extended. Under prior legislation, this key credit expired at the end of 2011 even though it enjoys significant bipartisan support in Congress as well as from the President. The new law revives the credit for 2012 and 2013.

• Section 179 depreciation enhanced and extended. Previously this important business tax break was set to fall to $125,000 in 2012 (with an investment limit of $500,000) from the previous dollar limit of $500,000. For 2013, absent new legislation, it would have fallen further to $25,000 (with a $200,000 investment limit). The new law restores the higher amounts for 2012 and 2013, with a dollar limit of $500,000 and an investment limit of $2 million.

• Bonus depreciation extended. Also extended through 2013 is 50 percent bonus depreciation. For some property the extension is through 2014. This tax break relates to certain new assets placed in service before January 1, 2014 (or January 1, 2015 depending on the property).

• Work Opportunity Tax Credit (WOTC) renewed. This tax break is part of the general business credit. It rewards employers for hiring individuals from targeted groups that are otherwise hard-to-employ. It provides a credit equal to 40 percent of the first year's wages, up to $6,000. The WOTC also revives the credit which expired at the end of 2012, related to hiring unemployed veterans and veterans with service-related disabilities (part of the Vow to Hire Heroes Act of 2011). The credit for hiring qualified veterans can be as high as $9,600.

This is just the beginning. The American Taxpayer Relief Act brings many changes, restores and extends some previous tax provisions and eliminates or alters others. As details are revealed we will bring you additional coverage of the features of the new law in future articles