5 important US tax law changes that will impact NRIs

After a long-drawn-out debate over the Bush Era tax cuts, the US Congress finally agreed on key tax changes through the American Taxpayer Relief Act of 2012. As a resident or citizen of the US, here are the top 5 changes that will impact your taxes when you file your 2013 individual tax returns in 2014.

Individual tax rates

Individual tax rates for 2013 remain the same as those for 2012 for single filers earning less than $400,000 and for joint filers earning less than $450,000. Filers over this threshold are subject to the new top tax rate of 39.6%.

Single Filers	Married Joint Filers	Rate
Up to $8,925	Up to $17,850	10%
Up to $36,250	Up to $72,500	15%
Up to $87,850	Up to $146,400	25%
Up to $183,250	Up to $223,050	28%
Up to $398,350	Up to $398,350	33%
Up to $400,000	Up to $450,000	35%
$400,001 and up	$450,001 and up	39.6%

Investment income rates

Long term capital gains tax rate remains the same, that is, at 15% for most taxpayers. However, for those at the highest tax slab, the maximum rate increases to 20% (from 15%.) So single filers earning more than $400,000 and married joint filers earning more than $450,000 will be taxed at 20% on long term capital gains.

Payroll taxes

One expiring provision that has not been extended is the payroll tax cut. Prior tax law had seen a reduction in social security payroll taxes from 6.2% to 4.2%. That is, employees paid only 4.2% in payroll taxes in 2011 and 2012. For 2013, this payroll tax is back to the higher level of 6.2%.

Other significant provisions

Here are some of the other provisions:

The Alternate Minimum Tax (AMT) has been patched permanently. Up until now, the threshold for AMT was not regularly indexed to inflation and more and more taxpayers would come under its fold every year. That has now been fixed. AMT will be adjusted to inflation and in 2013, the exemption amount is $51,900 for individuals and $80,800 for married couples filing jointly.

American opportunity credit and child tax credit have been extended through 2017

Overall itemized deduction and personal exemption phase-out have been reinstated for married joint filers with Adjusted Gross Income over $300,000. That means, for each $2,500 of AGI over the threshold, personal exemptions are reduced by 2%. And itemized deductions are reduced by 3% of the amount by which AGI exceeds the threshold.

Medicare tax
Technically, this is not part of the American Taxpayer Relief Act of 2012 but an altogether new tax introduced under President Obama’s new Healthcare Bill. Since this will impact your 2013 taxes, it is important to mention it in this list.

Accordingly, an additional 0.9% ‘medicare tax’ will be levied on wages and self-employment income in excess of $200,000 for single filers and $250,000 for married joint filers.

In addition, a 3.8% ‘medicare tax’ will be levied on investment income. “For individuals, this tax is equal to 3.8% of the lesser of net investment income or the excess of Modified Adjusted Gross Income over the threshold amount. The threshold amounts for single taxpayer is $200,000 and for married taxpayer is $250,000,” explains Vinay Navani, CPA and director of tax at New Jersey based firm Wilkin & Guttenplan, P.C.

More importantly, Navani says, “The tax does not apply to S corp and partnership income if the taxpayer is active. Many taxpayers need to take a fresh look at the passive activity rules to see if they can modify their level of activity, if possible, to make sure they are active in the business.”