Reducing Uncertainty, Increasing Complexity

Each April, most Americans file their income tax returns for the previous year. By this time next year, in April 2014, you'll be filing your tax return for 2013, and the rules will be governed by the American Taxpayer Relief Act of 2012, the last minute deal that averted the so-called fiscal cliff.

The good news is that large portions of this new law are permanent, or at least as permanent as any tax law can be. The major portions of the law won't sunset so the nation won't have to relive the uncertainty about tax law that captured headlines in December 2010 and December 2012.

In addition, many taxpayers will not face major changes under the new law. It true that Social Security payroll taxes will rise for all workers, but that partial holiday was a temporary measure in effect during 2011 and 2012 to spur a slow economy. The income and estate tax benefits from earlier in this century largely remain in effect.

The catch? Taxpayers with higher incomes face a variety of higher taxes. Those taxes are imposed at different levels of income and on different types of income: adjusted gross income (AGI), modified adjusted gross income (MAGI), and taxable income. Owners of S corporations and limited liability companies (LLCs) who report business net income on their personal tax returns may be especially vulnerable to the higher rates. Similarly, taxpayers who report much higher income in a given year, perhaps because of a Roth IRA conversion or an asset sale, might have to wrestle with the higher rates and increased complexity of the new law.

The CPA Client Tax Letter (ISSN 1942-7271) is prepared by AICPA staff for the clients of its members and other practioners. The Tax Letter carries no official authority, and its contents should not be acted upon without professional advice. Copyright © 2013 by the American Institute of Certified Public Accountants, Inc., New York, NY 10036-8775.

In accordance with IRS Circular 230, this newsletter is not to be considered a covered opinion or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.