The recently enacted American Taxpayer Relief Act of 2012 (ATRA) is a mixed bag of higher tax rates on income and capital gains for high earners along with the extension of several favorable personal and business tax provisions that were due to expire. Here is an overview of some of the more notable sections of the new tax law that could have an impact on you and your medical practice.
Individual Tax Rates
ATRA introduces a new top 39.6% income-tax rate for individual taxpayers. For 2013, the 39.6% rate will apply to taxable income over these thresholds: $450,000 (married-joint filers), $400,000 (single filers), $425,000 (head-of-household filers), and $225,000 (married-separate filers). These income thresholds are subject to future inflation adjustment. The other individual tax rates (10%, 15%, 25%, 28%, 33%, and 35%) will remain in place.
Capital Gains/Dividend Rate Change
A new 20% maximum rate on net capital gain (the excess of net long-term capital gain over net short-term loss) will apply to individual taxpayers whose income is greater than the thresholds outlined above for the 39.6% bracket. The existing 0% and 15% rates on net capital gains have been extended permanently for other taxpayers. Remember, though, that 2010’s health care reform law imposes a 3.8% surtax on investment-related income (including capital gains) starting in 2013. This means that certain higher income taxpayers could pay as much as 23.8% in taxes on their net capital gains.
On the plus side, qualified dividends will continue to be taxed at the favorable capital gains rates instead of at the higher rates that apply to salaries and other types of ordinary income. Like capital gains, dividend income is potentially subject to the 3.8% surtax in addition to income tax.
Estate and Gift Taxes
ATRA sets the top federal estate- and gift-tax rate at 40% with a basic exclusion amount of $5 million (inflation adjusted) for individuals dying and for gifts made after 2012. (The basic exclusion amount is the amount effectively exempted from federal gift and estate tax by a person’s unified credit. The inflation-adjusted basic exclusion amount is $5.25 million for 2013.) Prior to ATRA, the top rate was scheduled to rise to 55% and the exclusion amount was to drop to $1 million after 2012.
The new law also makes permanent an exclusion “portability” provision helpful to married couples. Under this provision, an estate’s executor may make an election allowing the use of the decedent’s unused exclusion for the surviving spouse’s own lifetime and death-time transfers.
Bonus Depreciation
Business taxpayers have been able to claim “bonus” first-year depreciation for certain asset purchases as part of an initiative to stimulate the economy. The new law extends for an additional year the 50% first-year bonus depreciation rule that generally applied to property acquired through 2012. Consequently, 50% bonus depreciation extends to qualified property acquired and placed in service through 2013.
In-plan Roth Conversions
Under ATRA, a 401(k) or other retirement plan offering designated Roth accounts may allow participants to roll over money from their pretax plan accounts to in-plan Roth accounts even if the participants are not otherwise eligible to receive a distribution that meets the usual rollover qualification requirements. In-plan Roth conversions are taxable events. However, no income taxes are due on qualified distributions from designated Roth accounts.
We Can Help
We can explain in further detail how the new tax law is likely to affect your practice and your personal planning strategies for the years ahead. Please contact us to learn how we can help you.
