UNITED STATES TAX ISSUES
The recently enacted “The Taxpayer Relief Act of 2012” that only increased taxes for 77% of the population made a number of changes for 2013 that affect U.S. Citizens Living In Bermuda.
Foreign Earned Income Exclusion and Foreign Base Housing Amount
In 2012 the foreign earned income exclusion was $95,100 and for 2013 the foreign earned income exclusion will increase to $97,600. The maximum foreign housing cost for 2012 is $90,000 and will likely remain the same for 2013. The foreign base housing amount in 2012 was $15,216 and will increase in 2013 to $15,616.
Personal Exemption and Standard Deduction
The personal exemption in 2012 was $3,800 and will increase to $3,900 for 2013. The standard deduction in 2012 for single taxpayers was $5,950 and will increase to $6,100 for 2013. The standard deduction in 2012 for married couples filing jointly was $11,900 and will increase to $12,200 for 2013.
Personal Exemption and Itemized Deduction Disallowance
If a single taxpayer’s income exceeds $150,000 and a married couples filing jointly adjusted gross income (AGI) exceeds $300,000, personal exemptions will be reduced by 2% for every $2,500 in excess of these amounts. As an example, if a single tax payer has an AGI of $225,000, then the $75,000 excess is divided by $2,500 = 30. 30 times 2% = 60%. Thus, 60 percent of the personal exemption will be disallowed.
If a single taxpayer's adjusted gross income (AGI) exceeds $150,000 and a married couple filing jointly adjusted gross income (AGI) exceeds $300,000, itemized deductions will be reduced by 3% for every $1 in excess of these amounts. As an example, if a single tax payer has an AGI of $225,000 and itemized deductions of $50,000, then the $75,000 excess is multiplied by 3% and $2,250 of itemized deductions will be disallowed. However, itemized deductions cannot be reduced more than 80% or in the preceding example $40,000.
Projected Individual Tax Rates for 2013
Individuals
If taxable income is: The tax will be:
Not over $8,925, 10% of taxable income
Over $8,925 but not over $36,250 $892.50 plus 15% of the excess over $8,925
Over $36,250 but not over $87,850 $4,991.25 plus 25% of the excess over $36,250
Over $87,850 but not over $183,250 $17,891.25 plus 28% of the excess over $87,850
Over $183,250 to $398,350 $44,603.25 plus 33% of the excess over $183,250
Over $398,350 to $400,000 $115,586.25 plus 35% of the excess over $398,350
Over $400,000 $116,163.75 plus 39.6% of the excess over $400,000
Married Couples Filing Jointly
If taxable income is: The tax will be:
Not over $17,850, 10% of taxable income
Over $17,850 but not over $72,500 $1,785 plus 15% of the excess over $17,850
Over $72,500 but not over $146,400 $9,982.50 plus 25% of the excess over $72,500
Over $146,400 but not over $223,050 $28,457.50 plus 28% of the excess over $146,400
Over $223,050 but not over $398,350 $49,919.50 plus 33% of the excess over $223,050
Over $398,350 but not over $450,000 $107,768.50 plus 35% of the excess over $398,350
Over $450,000 $125,846 plus 39.6% of the excess over $450,000
Qualified Dividends and Long Term Capital Gains
The tax rate will remain at 15% on qualified dividends and long term capital gains except for single taxpayers with AGI in excess of $400,000 and married couples filing jointly with AGI in excess of $450,000 who will pay a 20% tax rate on qualified dividends and long term capital gains.
Unearned Income Medicare Contribution Tax
Single taxpayers with AGI in excess of $200,000 and married couples filing jointly with AGI in excess of $250,000 who will pay a 3.8% Medicare Contribution tax on the lesser of their investment income or their income in excess of these amounts. As an example, if a single taxpayer had investment income of $60,000 and total income of $300,000 they would pay the lesser of $100,000 x 3.8% = $3,800 or 3.8% x $60,000 = $2,280.
Social Security and Medicare Tax
For 2013 the Social Security wage base will be $113,700 with a return to the 6.2% tax rate. The Medicare wage base will be 1.45% on all earned income. However, if a single taxpayer's earned income exceeds $200,000 and a married couples filing jointly earned income exceeds $250,000, the Medicare tax increase to 2.35% on all earned income in excess of these amounts.
Gift Tax/Estate Tax
The gift tax and estate tax have again been unified. The 2013 exemption is projected to be in the $5,000,000 to $5,250,000 range. The gift/estate top tax rate will be 40%. The tax law preserves the unused estate exclusion carry forward from the 2012 tax law.
The annual gift tax exclusion for 2013 will be $14,000 per person. The annual gift tax exclusion for 2013 to a Non-Resident Spouse will be $143,000.
Expatriation to Avoid Tax
For 2013, an individual with “average annual net income tax” of more than $155,000 for the 5 taxable years prior to 2013 will be considered a “covered expatriate.” For 2013 the amount that would be includible in gross income and subject to the “exit tax” is reduced by $668,000.
Impact
The tax impact will clearly be on high income earners. A single individual with compensation of $800,000 and $200,000 in qualified investment and long term capital gains with $250,000 in itemized deductions would have paid about $213,600 in income, Social Security and Medicare tax in 2012. In 2013 said individual will pay about $270,100 in income, Social Security and Medicare tax.
Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.
The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own U.S. tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.
James Paul Sabo, CPA, is the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxservices.com