Managing the Impact of 2012 ATRA Tax Rate Increases

The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013. While it included a lot of good news, it also raised top marginal rates on both ordinary income and capital gains / qualified dividends.

Single

Married filing jointly

Married filing separately

Head of Household

When it applies

Taxable income over $400,000

Taxable income over $450,000

Taxable income over $225,000

Taxable income over $425,000

Tax rate on next $1 of ordinary income

39.6% (up from 35%)

Tax rate on next $1 of capital gains / qualified dividends

20% (up from 15%)

 

Unlike the 3.8% surtax discussed here, these higher rates are imposed on taxable income – which means that while they can be managed similarly to the 3.8% surtax, by decreasing income, they can also be managed by increasing itemized deductions or business deductions. (Generally speaking, increasing itemized or business deductions will not decrease the amount of 3.8% surtax imposed.)

If you expect to be taxed at these highest marginal rates, consider increasing:

  • Charitable contributions.
  • Deductions by your business that is a pass-through entity (an S corporation, a partnership or an LLC that is taxed as a partnership). With higher individual tax rates, the after-tax cost of investing in your pass-through business has decreased.
  • Helpful business deductions include capital improvements that can be expensed under continued generous expensing allowances and 50% bonus depreciation.

But keep in mind – this rate increase is no more or less than it seems. This is a 5% increase in top tax rates, back to levels that were in effect through the 1990s. While the historically low rates of 2001 to 2012 have partially gone away, some of the beneficial rules from those years still apply, including a 0% tax rate on capital gains and dividends for some taxpayers (including taxpayers with significant investment income, provided their itemized deductions are also significant).

As always, planning is the best way to manage your tax liabilities. Contact us if you would like us to prepare a tax projection to determine how higher tax rates affect you.

Author: Susan Sterne, CPA, Principal

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