The American Taxpayer Relief Act profoundly affected retirement, tax & estate planning.
The American Taxpayer Relief Act of 2012 brought seven major changes to federal tax law, alterations that have affected retirement, tax and estate planning ever since. Here is an overview of ATRA’s impact.
Six tax brackets became seven. In addition to the 10%, 15%, 25%, 28%, 33% and 35% brackets, a 39.6% top bracket was installed for the highest earners. In 2015, it applies for individuals with incomes greater than $413,200 and married joint filers with incomes exceeding $464,850.1,2
A health care surtax appeared. Since 2013, a 3.8% Medicare surtax (properly known as the Net Investment Income Tax) has been levied on the lesser of either a) net investment income or b) the amount of MAGI exceeding $200,000 for single filers and $250,000 for couples filing jointly. MAGI is not simply your wages; it can also include bonuses, taxable interest, RMDs taken from a traditional IRA or an employer-sponsored retirement plan, “unearned” net investment income such as dividends or net capital gains, passive income from a partnership, and even rents and royalties.3,4
Additionally, the Medicare payroll tax effectively became 2.35% for employees with MAGIs exceeding $200,000. Since ATRA, employers have deducted 1.45% in Medicare payroll taxes from employee paychecks up until that threshold, and 0.9% more from paychecks once a worker’s wages surpass it. While individuals may have MAGIs of $200,000 or less, a married couple filing jointly may have a MAGI that surpasses $250,000 – and at that threshold, the 0.9% surtax kicks in for those couples.5
An estate tax crisis was avoided. If ATRA had not been passed, estate taxes would have topped out at 55% and all estates worth more than $1 million would have been subject to them. We now have a 40% top estate tax rate and a $5.43 million individual exemption (which will continue to rise with inflation).6
The individual estate tax exemption also became permanently portable. In other words, any unused portion of a $5.43 million individual exemption may be transferred to the surviving spouse at the death of the first deceased spouse.6
Taxes on investment income rose for the wealthy. After ATRA’s passage, capital gains and dividend taxes remained at 0% for those in the 10% and 15% federal income tax brackets and 15% for filers in the 25%, 28%, 33% and 35% brackets. Taxpayers, trusts and estates in the 39.6% bracket began paying 20% tax on capital gains and dividends.7
Roth conversion rules expanded for workplace retirement plans. If a 401(k), 403(b), or 457(b) plan allows a Roth option, the accountholder may make a Roth conversion at any age and the conversion may include all pre-tax contributions. Of course, any account balance so converted must be included in the income of the taxpayer in the year of the Roth conversion.8
The AMT was finally indexed for inflation. ATRA saved certain taxpayers some busy work as a result. For 2015, AMT exemption amounts are $53,600 for single filers and $83,400 for joint filers.9
ICA does not provide tax or legal advice.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – irs.gov/uac/Newsroom/Annual-Inflation-Adjustments-for-2013 [1/11/13]
2 – efile.com/tax-rate/federal-income-tax-rates/ [1/15/15]
3 – kiplinger.com/article/taxes/T055-C005-S002-higher-earners-will-pay-more-taxes-this-spring.html [4/14]
4 – irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs [11/13/14]
5 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Questions-and-Answers-for-the-Additional-Medicare-Tax [3/5/15]
6 – nolo.com/legal-encyclopedia/federal-gift-estate-law-2013-beyond.html [1/8/13]
7 – chernoffdiamond.com/services/private-client-executive-life-insurance/2014-federal-capital-gains-dividends-tables/ [3/17/15]
8 – forbes.com/sites/ashleaebeling/2013/01/02/roth-401k-conversions-for-all-thanks-to-fiscal-cliff-deal/ [1/2/13]
9 – forbes.com/sites/kellyphillipserb/2014/10/30/irs-announces-2015-tax-brackets-standard-deduction-amounts-and-more/ [10/30/14]