Massive changes to the US tax code are set to take effect in 2013 unless Congress acts. Key changes include: 1) a new 3.8% Medicare tax on investment income for high earners; 2) a new 0.9% Medicare tax on earned income for high earners; 3) a higher 10% floor for medical expense deductions. Other changes impact capital gains tax rates, ordinary income tax rates, dividend tax rates, AMT, payroll taxes, depreciation rules, and estate/gift taxes. The changes mean higher taxes for many individuals and businesses.

1. Massive Tax Changes in Store for 2013
On January 1, 2013 a number of favorable tax provisions are set to expire and some new taxes
are set to begin. If Congress fails to act, the federal tax code will be a less hospitable climate for
everyone. Here are the highlights.
3.8% Medicare Tax on Investment Income (A new tax under the Healthcare Act)
In 2013 you might be subject to an additional 3.8% tax on investment income.
Starting in 2013, these taxpayers will be at risk:
o Taxpayers filing married-jointly, with adjusted gross income over $250,000; or
o Taxpayers filing single, with adjusted gross income over $200,000.
Taxpayers who meet these benchmarks will be subject to 3.8% surtax on investment
income. This 3.8% tax is in addition to the tax already due on affected income. Income
that will be subject to the 3.8% surtax includes interest, dividends, capital gains, rents and
royalties and other unearned income (like passive income from a business in which a
taxpayer is an owner including partnerships and S corporations).
.9% Medicare Tax on Earned Income (A new tax under the Healthcare Act)
In 2013, you might be subject to an additional .9% tax on earned income.
Starting in 2013, these taxpayers will be at risk:
o Taxpayers filing married-jointly, with adjusted gross income over $250,000; or
o Taxpayers filing single, with adjusted gross income over $200,000.
Employees and employers have historically split the 2.9% Medicare payroll tax, with
each paying 1.45% on all wages earned by the employee.
Starting in 2013, taxpayers with earned income above the threshold amounts will be
subject to an additional .9% Medicare payroll tax on earned income. The additional .9%
tax is imposed only on the employee, and only on income in excess of the
$250,000/$200,000 threshold.
10% AGI Floor for Medical Expense Itemized Deduction (A provision under the
Healthcare Act)
In 2013, your potential itemized medical expense deduction will decrease.

2. Currently, taxpayers can deduct medical expenses as an itemized deduction if the
expenses were incurred during the year and exceeded 7.5% of AGI. The minimum level
of deductible expenses will increase in 2013 to 10% of AGI. Taxpayers age 65 and older
will continue to be eligible to use the 7.5% of AGI minimum, at least through 2016.
20% Maximum Capital Gains Tax Rate
In 2013, you might be subject to a 5% increase in capital gains tax rates.
Starting in 2013, the top long-term capital gains tax rate will go up to 20% from 15%.
Generally speaking, married taxpayers earning more than $60,000 will be subject to the
20% capital gains tax rate.
Increases in Ordinary Income Tax Rates
In 2013, you will be subject to increased ordinary income tax rates.
Here is a comparison of the 2012 marginal income tax brackets and possible 2013
brackets for a married couple filing jointly. In 2013, the lowest marginal rate will
increase from 10% to 15% while the highest marginal rate will increase from 35% to
39.6%.
2012 2013
$0 to $17,500 10% $0 to $59,300 15%
$17,501 to $71,000 15% $59,301 to $143,350 28%
$71,001 to $143,350 25% $143,351 to $218,450 31%
$143,351 to $218,451 28% $218,451 to $390,050 36%
$218,451 to $390,050 33% $390,051 and above 39.6%
$390,051 and above 35%
No More Qualified Dividends
Dividends you receive in non-qualified securities accounts will be subject to ordinary
income tax rates.
Under current law and for the last several years, a portion of many taxpayers’ ordinary
dividends were given special tax treatment as “qualified dividends.” Qualified dividends
have been taxed at lower capital gains rates instead of ordinary income tax rates.
Beginning in 2013, all stock dividends will be taxed at ordinary income tax rates. Some
may also be subject to the 3.8% surtax discussed above.

3. Alternative Minimum Tax
In 2012, you might be subject to Alternative Minimum Tax (“AMT”).
Since the late 1960s, the AMT has been a part of the tax code. The stated purpose of the
AMT was to assure that the wealthiest Americans paid a minimum amount of tax
irrespective of certain deductions. However, the AMT thresholds have not kept up with
inflation. Every year as more and more taxpayers have been subject to AMT, Congress
has enacted “patches” or short-term fixes to reduce the coverage of the tax.
No AMT patch exists for tax year 2012 and if Congress fails to act, AMT is projected to
hit 31 million taxpayers in 2012, up from only 4 million in 2011.
Payroll Tax Holiday
Your payroll taxes (or self-employment tax if self-employed) will go up by 2%.
For 2011 and again for 2012 (with much Congressional jockeying), the employee’s share
of the Social Security portion of payroll tax decreased from 6.2% to 4.2%. Without
further action by Congress, the rate will go back to 6.2% starting January 1, 2013.
Bonus Depreciation
Your business will not be able to accelerate depreciation in the first year of purchasing a
capital asset.
For the last decade, favorable depreciation deduction rules have been enacted and
extended which have allowed taxpayers to depreciate 30%, 50%, and (in some years)
100% of qualifying capital purchases in the year of purchase. Additionally, Section 179
of the tax code provided a more limited in scope, lump sum deduction for small
businesses acquiring capital assets. Starting in 2013, all bonus depreciation provisions
will expire leaving capital assets to be depreciated solely overtheir useful lives (from as
little as 3 to as many as 39 years).
Estate and Gift Tax
Your estate will be far more exposed to more costly estate taxes with less room for
planning strategies.

4. o Estate Tax: Paid by estate of decedent or for married couples, typically after death
of surviving spouse.
Year Amount of wealth excluded Top tax rate on estate value
from estate tax in excess of exclusion
2012 $5,120,000 if single; 35%
$10,240,000 if married
2013 $1,000,000 if single; 55%
$2,000,,000 if married
o Gift Tax: Paid during life by person giving gift subject to tax.
Year Amount you can give during Top tax rate on gifts in
life before paying gift tax excess of allowable
2012 $5,000,000 if single; 35%
$10,000,000 if married
2013 $1,000,000 if single; 55%
$2,000,000 if married
To discuss these tax changes and planning strategies, call Steve Filipowski at 312-803-
7102.