by Carolyn Rothwell on February 5, 2013

ATRA (Part 3) - Federal Income Tax Changes

ATRA, at its core, made the Bush Era tax cuts permanent for taxpayers who make less than $450,000 (joint), $400,000 (single), or $425,000 (head of household). For anyone above those limits the tax cuts were allowed to sunset, meaning the reintroduction of the 39.6% marginal tax bracket, as well as the 20% long-term capital gains rate.

These have all been talked to death, but here are the highlights in case you’ve missed any of the salient points for federal income tax:

  • 39.6% tax bracket reintroduced for taxable income of $450,000/$400,000
  • 20% long-term capital gains rate for taxable income of $450,000/$400,000
  • Qualified dividends preferred tax rate retained permanently
  • Reintroduction of Pease Itemized Deduction Limitation
  • Reintroduction of personal exemption phase-out
  • Pease Limitation and personal exemption phase-out unified at $300,000/$250,000
  • State sales tax itemized deduction extended through 2013
  • Child Tax Credit at $1,000 made permanent
  • Extension of the American Opportunity Tax Credit through 2017
  • Earned Income Credit has several aspects made permanent or extended through 2017
  • Adoption Credit made permanent
  • Child and Dependent Care Credit made permanent at 35% rate with $3,000/$6,000 cap
  • Coverdell enhancements made permanent (including $2,000 max contribution)
  • Teacher’s classroom deduction extended through 2013
  • Cancellation of indebtedness income from cancellation of mortgage debt on a primary residence up to $2 million extended through 2013
  • Mortgage Insurance Premiums will continue to be treated as deductible interest through 2013
  • Tax-free IRA distributions to charity of up to $100,000 extended through 2013 (counts toward RMD)

And don’t forget the changes coming in 2013 from the Patient Protection and Affordable Care Act, including:

  • 3.8% Medicare tax on net investment earnings for those with an AGI over $250,000/$200,000
  • Additional .9% Medicare tax on earnings for those with an AGI over $250,000/$200,000
  • Itemized deduction for medical expenses now has a 10% floor instead of 7.5%
This is the final article on our special ATRA blog post series.  In case you missed the earlier posts, here are the links to part 1 and 2 of the ATRA series:  


describe the imageTOTAL Planning Suite Users, the 2013 tax updates are available!  Click the image on the right to update your financial planning software to the latest version. 

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Carolyn Rothwell

Carolyn enjoys spending her time building Money Tree Software's brand and products. Her experience creating and delivering financial plans for a full-service financial planning firm and supporting advisors working to provide the best planning to their clients as a Money Tree support member has provided an excellent understanding of the importance of financial planning.