Joint Committee on Taxation Issues Overview of Federal Tax System for 2013

• The Joint Committee on Taxation (JCT) has provided a summary of the federal tax law as in effect for 2013. As part of its analysis, the JCT projected various inflation adjustments for 2013.  The personal exemption is $3,900. The personal exemption phaseout begins when AGI exceeds $250,000 (single), $275,000 (head-of-household), $300,000 (married filing jointly) and $150,000 (married filing separately). Personal exemptions completely phase out at $372,501 (single), $397,501 (head-of-household), $422,501 (married filing jointly) and $211,251 (married filing separately)
• The standard deduction is $6,100 (single, married filing separately), $8,950 (head-of-households), and $12,200 (married filing jointly, surviving spouses).
• The Pease limitation on itemized deductions begins at AGI in excess of $250,000 (single), $275,000 (head-of-household), $300,000 (married filing jointly) and $150,000 (married filing separately).
• The AMT exemption amounts are: $51,900 (single, head-of-household), $40,375 (married filing separately), and $80,750 (married filing jointly, surviving spouses). $23,100 (estates, trusts). The exemption amounts phase out when AMTI exceeds $153,900 (married filing jointly, surviving spouses), $115,400 (single, head-of-household), $76,950 (married filing separately, estates and trusts).
• The maximum tax rate on an individual’s adjusted net capital gain is 20 percent on any amount of gain that otherwise would be taxed at a 39.6 rate. In addition, any adjusted net capital gain otherwise taxed at a 10- or 15-percent rate is taxed at a zero-percent rate. Adjusted net capital gain otherwise taxed at rates greater than 15-percent but less than 39.6 percent is taxed at a 15 percent rate. These rates apply for purposes of both the regular tax and the alternative minimum tax and dividends are generally taxed at the same rate as capital gains.
• The child tax credit is $1,000 per child. The phaseout for individuals begins at $75,000 (singles and head-of-household), $110,000 (married filing jointly), and $55,000 (married filing separately). To the extent the child credit exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit. The additional child tax credit is equal to 15 percent of earned income in excess of $3,000.
• In 2013, the maximum EITC is $6,044 for taxpayers with more than two qualifying children, $5,372 for taxpayers with two qualifying children, $3,250 for taxpayers with one qualifying child, and $487 for taxpayers with no qualifying children. The credit amount begins to phase out at an income level of $17,530 ($7,970 for taxpayers with no qualifying children). The phaseout percentages are 15.98 for taxpayers with one qualifying child, 17.68 for two or more qualifying children, and 7.65 for no qualifying children.
• The net investment income tax is 3.8 percent of the lesser of net investment income or the excess of modified adjusted gross income over $250,000 (married filing jointly, surviving spouses), $125,000 (married filing separately) and $200,000 (single, head-of-household).
• The employee’s share of Social Security tax is equal to 6.2 percent of covered wages up to the wage base of $113,700 and the Medicare tax is 1.45 percent of covered wages. There is no wage cap for Medicare tax. However, for 2013, the employee portion of the Medicare tax is increased by an additional tax of 0.9 percent on wages in excess of $250,000 (married filing jointly), $125,000 (married filing separately), and $200,000 (single, head of household or surviving spouse). Moreover, unlike the general 1.45 percent Medicare tax on wages, in the case of a joint return this additional tax is on the combined wages of the employee and the employee’s spouse. This additional tax also applies to self-employed individuals.

IRS Plans January 30 as Tax Season Opener for Form 1040 Filers

The IRS plans January 30 as the opening day for the 2013 tax return filing season. The IRS announced that it will begin accepting tax returns on that date after it updates forms and completes programming and testing of its processing systems. The vast majority of tax filers, more than 120 million households, should be able to start filing tax returns starting on January 30.

The IRS will be able to accept returns affected by the late alternative minimum tax (AMT) patch as well as three other extender provisions; those for individuals who claim the state and local sales tax deduction, the higher education tuition and fees deduction, and the educator expenses deduction.

The remaining taxpayers will be able to start filing in late February or March due to form and processing changes. This group includes individuals who are claiming residential energy credits, depreciation of property or general business credits. The IRS will not process paper returns prior to the anticipated opening date. The best option is to file electronically. The IRS states that it will be working closely with the tax software industry and tax professional community to minimize delays and ensure as smooth a tax season as possible under the circumstances.

New Jersey Court Decision: Personal Income Tax: Undistributed Income of Trust Not Subject to Tax

Court Decision: A testamentary trust did not owe New Jersey income tax on its undistributed trust income because it would have violated the due process requirements of the U.S. Constitution. The resident trust was created by a New Jersey domiciliary for the benefit of his descendants and owned cash, bonds and stock. The trust was allocated income as a result of its ownership of stock in four S corporations because each of the S corporations conducted some business inside New Jersey.

In 2006 the trust did not pay tax on the interest income or on the net pro rata share of S corporation income that was allocated outside New Jersey. Following an audit, the trust was assessed a deficiency because the Director of the Division of Taxation concluded that the trust was taxable on 100% of its undistributed income, including its net pro rata share of S corporation income that was allocated outside New Jersey.

Precedent barred New Jersey from taxing the undistributed income of a trust if the trustee, assets and beneficiaries are located outside New Jersey. The trustee argued that since he was not a New Jersey resident, and no assets were located in New Jersey, the trust lacked sufficient contacts with New Jersey for the state to tax the trust as a resident trust. The director argued that the trust had the requisite contacts with New Jersey to be taxed because it filed a New Jersey return and did so using a New Jersey address. However, simply using a New Jersey address on the return did not create the required contacts between the trust and New Jersey for the director to overcome the due process threshold that would otherwise permit the imposition of tax.

Further, owning stock in the four S corporations that conducted business in New Jersey did not mean that the trust could be treated as owning the assets of those corporations in order to create the requisite nexus to subject the trust to tax on its undistributed non-New Jersey income as the director argued. The director was incorrectly conflating pass-through taxation with ownership of the underlying assets, but the owner of stock in an S corporation does not own or hold title to the underlying assets of the corporation.

Lastly, the director asserted that the trust was subject to taxation on its out-of-state income, but the trust did not have sufficient contacts with New Jersey to satisfy due process requirements. Similarly, the trust did not owe taxes on its interest income for 2006 either.  Residuary Trust A v. Director, Division of Taxation, New Jersey Tax Court, No. 000364-2012, January 3, 2013.