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Many key federal tax rules affecting individuals will “sunset” at the end of 2012 unless Congress acts otherwise to extend or permanently enact those provisions. As year-end is approaching quickly, it is wise to be aware of what to expect in 2013, absent further legislation.

Key tax law changes affecting individuals beginning in 2013 if prior laws’ sunsets go into effect:

  • Ordinary income-tax brackets – The 10% bracket goes away, with the lowest bracket being 15%. The size of the 15% bracket for married individuals filing a joint return will be less (167%) than twice the size of the 15% bracket for individual filers, as it is currently. The top four brackets rise from 25%, 28%, 33%, and 35% to 28%, 31%, 36%, and 39.6%, respectively.
  • Taxation of capital gains and qualified dividends – Generally, long-term capital gains will be taxed at a maximum rate of 20%, an increase from 15%, for higher bracket taxpayers. A 10% rate applies to individuals in the 15% tax bracket. Qualified dividends will be taxed at ordinary income-tax rates (up to 39.6%), as opposed to receiving capital gain treatment, as under current law.
  • Reduction in itemized deductions – For higher income individuals, most itemized deductions will be reduced by 3% of adjusted gross income (AGI) above an inflation-adjusted threshold. Reduction cannot exceed 80% of the amount of itemized deductions otherwise allowable.
  • Phaseout of personal exemptions – Higher income taxpayers’ personal exemptions will be phased out by a certain percentage when AGI exceeds a certain inflation-adjusted threshold.
  • Coverdell Education Savings Accounts (formerly Education IRAs) – Maximum allowable annual per-beneficiary contribution will drop to $500 (from $2,000). Many other adverse changes will apply, including a reduced phaseout range for joint filers
  • Student loan interest deduction – This above-the-line deduction will apply only to interest paid during the first 60 months in which interest payments are required.
  • Child tax credit – The maximum allowable credit will drop from $1,000 to $500, and the credit will not be allowed as an offset against the alternative minimum tax.
  • Dependent care credit – Tax credit for allowable household and dependent care expenses will drop from $3,000 (for one qualifying individual) and $6,000 (for two or more) to $2,400 and $4,800, respectively. Also, the maximum percentage credit will drop from 35% to 30%, and the AGI-based percentage reduction will begin at $10,000 instead of $15,000.
  • Earned income tax credit (EITC) – Multiple changes will include a reduced EITC for eligible taxpayers with three or more children and lower threshold phaseout amounts for individuals, surviving spouses, and heads of households.
  • Estate-, gift-, and generation-skipping transfer (GST) taxes – The top rate will increase to 55% (plus a 5% estate-tax surtax on certain estates), from 35% currently.  The unified gift- and estate-tax credit exemption amount and GST exemption amount will be reduced to $1 million (plus an inflation adjustment, from $5.12 million currently).

These are just some of the tax law provisions that are scheduled to change. Contact us for more information.