CHAPTER 1: US and Canada Tax Changes

By: Tanzeela Ayub & Peter Megoudis

US Tax Changes
The year 2013 ushered in quite a few important changes mainly as a result of the American Taxpayer
Relief Act of 2012 (the ATRA) enacted on January 2, 2013, and the provisions in the Patient Protection
and Affordable Care Act of 2010 (Affordable Care Act) that is scheduled to take effect in 2013 and 2014.
The Act made permanent most of the cuts, including lower individual tax rates on ordinary income,
capital gains, and dividends. For higher income taxpayers, 2013 also represents a year of increased tax
burden in comparison to previous years.
This chapter provides a synopsis of important changes for 2013 and beyond.
Increased Income Tax Rates:
Beginning in 2013 tax years, the 39.6% income tax bracket begins at taxable incomes of
$400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married
taxpayers filing jointly and $225,000 for married taxpayers filing separately (up from 35% in
2012).
The above thresholds also apply for the higher 20% rate on long term capital gains and qualified
dividends (up from 15% in 2012). If taxable income is not in excess of the above thresholds, the
tax rate for long term capital gains and qualified dividends continues to be 15% or 0% (for
taxpayer below the 25% tax bracket).
A credit can be claimed under Article XXIV of the US-Canada Treaty for the tax difference
between 20% and 15% income tax rate on the US return for high income taxpayers who are
subject to the 20% tax on qualified dividends. Accordingly, a 20(11) deduction can be claimed on
the Canadian return for the amount of tax claimed as a credit under Article XXIV on the US
sourced qualified dividends.
New health care taxes:
In addition to the new top rates on ordinary and investment income under the Act, married taxpayers
generally earning in excess of $250,000 and unmarried taxpayers earning over $200,000 are subject
to the following new taxes that were enacted in the Patient Protection and Affordable Care Act of
2010:
Net Investment Income Tax (NIIT):
There is a new 3.8% Medicare surtax levied on certain unearned income of individuals. The tax
applies to the lesser of an individuals
i) NII or
ii) The excess of the individuals modified adjusted gross income (MAGI) over these threshold
amounts:
(1) $250,000 in the case of a joint return or surviving spouse
(2) $125,000 in the case of a married individual filing a separate return
(3) $200,000 in any other case
For trusts and estates, the NIIT applies to the lesser of:

Chapter 1: US and Canada Tax Changes

Page 2 of 8
i) Undistributed Net Investment Income or
ii) The excess of a trust or estates adjusted gross income (as defined in section 67(e)) over the
dollar amount at which the highest income tax bracket applicable to an estate or trust begins
(2013 threshold is $11,950)
NII is defined in section 1411(c)(1)(A)(i), (ii), and (iii). In general, investment income includes,
but is not limited to: interest, dividends 1, capital gains, rental and royalty income, non-qualified
annuities, income from businesses involved in trading of financial instruments or commodities,
and businesses that are passive activities to the taxpayer (within the meaning of IRC section 469).
To calculate the Net Investment Income, the investment income is reduced by certain expenses
properly allocable to the income. Examples of properly allocable deductions include investment
interest expense, investment advisory and brokerage fees, expenses related to rental and royalty
income, and state and local income taxes properly allocable to items included in Net Investment
Income.
The NII Tax applies to rental income that is not associated with a trade or business. The trade or
business category is most likely reserved for real estate professionals who can meet the material
participation requirements and can treat the income as non-passive.
Form 8960, Net Investment Income Tax Individuals, Estates and Trusts
This Form is to be used to calculate the NII tax. The tax amount then flows to line 60 of Form
1040 and Schedule G, line 4 of Form 1041.
See separate chapter on NIIT for further details
Medicare-funding hospital insurance payroll tax:
The Medicare portion of FICA tax rose by 0.9 percent to 2.35percent from 1.45 for high earners.
The increase applies only to wages and net self-employment income that is in excess of $200,000
for single taxpayers and $250,000 for those married and filing jointly.
A few points to note are as follows:
Self-employed individuals are not permitted to deduct any portion of the additional tax. Also
note that it does not change the employer HI contribution.
The employer is required to commence withholdings for the first pay period in which wages
exceed $200,000. For withholding threshold applicability, the employer doesnt need to take
into account spouses wages and employees other employment, unless it is paid for services
to a related entity by a common employer. It applies to any individual subject to FICA taxes
on earned income and can include non-residents of the US earning wages and selfemployment income in the US.
To the extent regular Medicare FICA is triggered by vesting of deferred compensation, the
additional 0.9% tax also applies to the vested benefit.
Medicare wages and self-employment income are combined to determine if income exceeds
the threshold. A self-employment loss should not be considered for purposes of this tax.
1

The Proposed Regulations provide guidance on the meaning of dividends for this purpose. Any item treated as a dividend
under chapter 1 is a dividend for purposes of NII, including but not limited to:
i)
Constructive dividends
ii)
Amounts treated as dividends under sections 1248(a), 1.367(b)-2(e)(2), and 1368(c)(2)
iii)
Distributions and gains that are treated as excess distributions under section 1291 that are dividends.

Chapter 1: US and Canada Tax Changes

Page 3 of 8

Form 8959, Additional Medicare Tax

Form 8959 calculates the amount of Additional Medicare Tax and reconciles the amount owed to the
amount of Additional Medicare Tax withheld by the employer, if any.

Calculate Additional Medicare Tax (i.e., 0.9%) on any wages in excess of the applicable
threshold for the filing status under Part I, II, III and IV of Form 8959. The Additional
Medicare Tax flows from Part IV of Form 8959 to line 60 of Form 1040.

Withholding Reconciliation under Part V of Form 8959

Step 1 Report Medicare Withholdings on W2 slips (line 19)
Step 2: Take Medicare Wages on W2 * 1.45% (regular Medicare Tax) (line 21)
Step 3: Deduct (1) from (2), the difference flows to line 63 of Form 1040 as Additional
Medicare tax withholding.

Note: If excess additional Medicare is withheld, a credit can be claimed against total tax liability on
the U.S. tax return.
To the extent Additional Medicare Tax is not withheld by the employer, the taxpayer must pay the
tax. The tax could be paid by making an estimated tax payment(s). However, any estimated tax
payments made will apply to any and all taxes on the taxpayers tax return, including any Additional
Medicare Tax. One cannot designate any estimated payments specifically for Additional Medicare
Tax.
Example 1:
Carl, a single filer, has $145,000 in self-employment income and $130,000 in wages. Carls
wages do not exceed $200,000. Therefore, Carls employer did not withhold Additional Medicare
Tax. However, the $130,000 of wages reduces the self-employment income threshold to $70,000
($200,000 threshold minus the $130,000 of wages). Carl is liable to pay Additional Medicare Tax
on $75,000 of self-employment income ($145,000 in self-employment income minus the reduced
threshold of $70,000). Carl must file Form 8959.
Example 2:
Erin and Frank are married and file jointly. Erin has $150,000 in wages and Frank has $175,000
in wages. Neither Erin nor Frank has wages that exceed $200,000. Therefore, their employers did
not withhold Additional Medicare Tax. However, their combined $325,000 in wages exceeds the
$250,000 threshold for joint filers. Erin and Frank are liable to pay Additional Medicare Tax on
$75,000 of wages ($325,000 in wages minus the $250,000 threshold). Erin and Frank must file
Form 8959

Reinstatement of Itemized Deductions Phase out and Personal Exemptions (PEP & Pease
limitations)

The Act has also reinstated a permanent personal exemption phase-out (PEP) and limitation on
itemized deductions (Pease) 2. This limitation is applicable to taxpayers with AGI over $250,000
(single filers) and $300,000 (joint filers). After being eliminated in prior years, these two
provisions now effectively increase marginal tax rates.

Known as Pease for the congressman who introduced it.

Chapter 1: US and Canada Tax Changes

Page 4 of 8

PEP: The personal exemption increased by $100 to $3,900 for 2013 and $3,950 for 2014. For
each $2,500 of earnings over the threshold, the personal exemptions are reduced by 2 percent.
As a result for the year 2013, personal exemptions completely phase out at AGI of $422,500
for married filing joint returns and at $372,500 for single filers.

Pease: Itemized deductions will be reduced by the lesser of: 3% of AGI over the above
mentioned applicable threshold or 80% of itemized deductions. It applies to deductions for
taxes, mortgage interest expense, charitable contributions, and miscellaneous itemized
deductions, but it does not apply to investment interest expense, casualty losses, medical
expenses, or gambling losses.
As an example, a married couple filing a joint return has an AGI of $440,000 and total
itemized deduction of $10,000, entirely due to charitable contributions. They will have zero
personal exemptions due to complete phase out as their AGI is more than the upper limit of
$422,500. Their itemized deductions would reduce by $4,200 [3% x(440,000 less 300,000)].

Complexity attached to the above tax increases

In many ways, the Act can be seen as increasing the complexity of the code. To illustrate, long-term
capital gains from the sale of typical appreciated stock and dividend income paid by a publicly traded
company will now potentially be subject to four different tax rates:
Zero percent for long-term capital gains and/or qualified dividends for taxpayers in the first two
tax brackets (10 and 15 percent);
15 percent for long-term capital gains and/or qualified dividends for taxpayers who are above the
15% tax brackets up to the Modified AGI thresholds ($200,000 and $250,000 for single and joint
filers, respectively) used for determining the applicability of the 3.8 percent net investment
income tax.
18.8 percent for long-term capital gain and qualified dividend income taxed between the net
investment income tax thresholds and the new thresholds for defining high-income taxpayers for
the top ordinary income tax bracket ($400,000 and $450,000 for single and joint filers,
respectively); and
23.8 percent for long-term capital gains and qualified dividends taxed above the top ordinary
income tax bracket thresholds (the combination of the new top 20 percent tax rate on net capital
gain and the 3.8 percent net investment income tax).
This range of tax rates does not take into consideration other types of capital gains transactions that
have unique rates, for example, unrecaptured section 1250 gain and collectibles taxed at 25 percent
and 28 percent, respectively.
With respect to ordinary income, high-income taxpayers will face the new 39.6 percent tax bracket.
However, they will also need to understand the effect of the additional 0.9 percent Medicare Hospital
Insurance tax. As discussed above, the Act renewed the hidden marginal rate increases by scaling
back itemized deductions (Pease limitation) and the phase-out of personal exemptions (PEP). These
taxes kick in under the new law when the AGI of a single or joint filer exceeds $250,000 or $300,000,
respectively, which is less than the entry point for the new highest marginal rate but above the entry
point for the new 0.9 percent Medicare tax. And for both ordinary and investment income there will
be the application of stacking rules to determine which income is taxed at the lower rates and which
at the higher.
See Annexure A for illustrative examples

Chapter 1: US and Canada Tax Changes

Page 5 of 8

Alternative minimum tax relief:

The Act provides permanent relief from the individual AMT, thus ending what had become an
almost annual ritual in Congress of adopting temporary patches to address the fact that the
AMT was not previously indexed for inflation.
The Act indexes the exemption amounts under the individual AMT annually for inflation starting
in 2013. The change provides greater protection from the AMT, particularly to taxpayers who
claim large itemized deductions for state and local taxes and those who have a large number of
dependents.
The Act also allows nonrefundable personal credits to be taken against the AMT starting in 2012
Increased tax rate spread will make taxpayers less susceptible to AMT (39.6% highest ordinary
tax rate versus 28% highest AMT rate). The more compressed rate spread under prior law had
made taxpayers more susceptible to AMT (35% highest ordinary tax rate versus 28% highest
AMT rate).

Extension of tax-free distribution from IRA for charitable contributions:

The Act also retroactively extended through 2013 the ability for taxpayers age 70 or above to
distribute up to $100,000 annually from individual retirement plans for charitable purposes.
The Act also allows individuals to convert any portion of their balance in an employer-sponsored
tax-deferred retirement plan into a Roth account under that plan. Note that this option is only
available if employer plan sponsor includes a Roth feature within the plan. The amount converted
would be subject to regular income tax.

Other miscellaneous items:

The maximum earnings subject to the Social Security tax for the year 2013 are $113,700 and
$117,000 for 2014.
Foreign earned income exclusion amount is $97,600 for 2013 and $99,200 for 2014.
Flexible spending accounts now have a $2,500 annual cap for the first time. These pretax
accounts, used to pay for family medical expenses, had no federal caps previously, although most
employers had imposed a $5,000 cap.
College tuition breaks were extended. Through the American opportunity tax credit, a credit of up
to $2,500 in 2013 and 2014 per student for first four years of higher education expenses paid.
Lifetime credit is 20% of tuition paid up to $2,000 per return for 2013 and 2014. Both credits are
subject to income limitations.
The child and dependent-care credit remains at a maximum 35 percent of $3,000 ($1,050) in
qualified expenses for one dependent grandchild, or a spouse who needs care while you work,
and 35 percent of $6,000 ($2,100 for two or more).
Annual contributions to plans such as 401(k) are at a maximum $23,000 for 2013 and 2014
$17,500 in regular contributions, plus $5,500 in catch-up contributions for those 50-plus.
The threshold on medical deductions increased. You can only deduct medical expenses that
exceed 10 percent of your adjusted gross income (up from 7.5 percent in 2012). However, if you
are 65 or older, the threshold stays at 7.5 percent. Beginning in 2017, everyone will be subject to
the 10 percent limit.
On a related note, the maximum on deductions for long-term care insurance premiums rose. This
is a tax break that many people don't know about. If you're age 51 to 60, you'll be able to deduct
up to $1,360; age 61 to 70, up to $3,640; after 70, up to $4,550 for such premiums.

Chapter 1: US and Canada Tax Changes

Page 6 of 8
Trust Tax Brackets:

An increase in the top marginal rate to 39.6 percent on ordinary income and 20 percent on
qualified dividends and long-term capital gains (up from 35 percent and 15 percent in 2012,
respectively) for trusts, beginning at $11,950 of taxable income in 2013;
Note that the act did not provide a 35% rate for the fiduciary returns; the table under Sec. 1(e)
after amendment provides rates of 15%, 25%, 28%, 33%, and 39.6%, the latter with a threshold
for 2013 of $11,950, which is the top bracket threshold. The new net investment income tax of
3.8%, also applies starting in 2013 to the lesser of (1) undistributed net investment income of the
trust or estate, or (2) its adjusted gross income, above this top bracket threshold.

Important incentives for small business:

Of the Acts extension of dozens of temporary business incentives, the most popular is likely the
higher dollar limits and phase-out thresholds for expensing of business equipment under Sec. 179.
The Act has extended through 2013 the $500,000 dollar limitation and phase out threshold of $2
million in the cost of Sec. 179 property placed in service during the tax year. It offers the most
flexibility for small businesses to write off business assets they acquire and to avoid depreciation
calculations. However, for the year 2014 the expensing limit is scheduled to revert to $25,000,
with a phase-out threshold of $200,000.
In addition, the Act extended through 2013 many temporary business tax deductions and credits
including, but not limited to, bonus depreciation for qualified property, the research and
experimentation credit, the subpart F active financing income exception, and the look through
treatment of payments between related controlled foreign corporations (CFCs) under the foreign
personal holding company rules.

Transfer Tax Provisions

Estate & gift taxes:
The estate and gift tax exemption amount is $5,250,000 for 2013 and $5,340,000 for 2014. A tax
rate of 40 percent will apply to all cumulative gift transfers and taxable estates in excess of the
exemption amount.
The annual gift tax exclusion amount is $14,000 for 2013 and 2014.
The annual gift tax exclusion for noncitizen spouse is $143,000 for 2013 and $145,000 for 2014.
The deceased spousal unused exclusion, or portability, provisions of Sec. 2010(c)(4) as
amended by the Tax Relief Act also remain.
GST tax
The Act extends the current generation-skipping transfer (GST) tax effective for decedents dying
and transfers made after December 31, 2012. The GST exemption in 2013 and 2014 will be equal
to the exclusion used for estate tax purposes.
Update on requirements for Form 8621
See separate chapter on PFICs
Canada Tax Changes
Increased Income Tax Rates
For Ontario, the top tax bracket of 13.16% (was 12.6% in 2012) will apply to taxable income over
$500,000.

Chapter 1: US and Canada Tax Changes

Page 7 of 8

For Quebec, the fourth bracket will be 25.75% for income over $100,000.

New contribution limit for tax-free savings accounts (TFSAs)

Effective 2013, the annual TFSA contribution limit is increased to $5,500 (from $5,000 since its
introduction in 2009).
New contribution limit for registered retirement savings accounts (RRSPs)
The 2013 RRSP contribution limit is increased to $23,820 (from $22,970 in 2012).
Lifetime capital gains exemption
Effective from tax year 2014, the maximum exemption will increase from $750,000 to 800,000
for capital gains realized on disposition of qualified property. The exemption amount will be
indexed for inflation after 2014.
Automobile deductions and benefits Maximum capital cost of passenger vehicles (purchased in 2013) for capital cost allowance
purposes: $30,000 plus applicable federal and provincial sales taxes.
Limit on deductible leasing costs for passenger vehicles (leased in 2013): $800 per month plus
applicable federal and provincial sales taxes.
Maximum allowable interest deduction for amounts borrowed to purchase an automobile in 2013:
$300 per month.
Limit on the deduction of tax-exempt allowances paid by employers to employees using their
personal vehicle for business purposes for 2013: 54 cents (53 cents for 2012) per kilometer for the
first 5,000 kilometers and 48 cents (47 cents for 2012) for each additional kilometer. For Yukon,
the Northwest Territories and Nunavut, the tax-exempt allowance is set four cents higher.
The general prescribed rate used to determine the taxable benefit relating to the personal portion
of automobile operating expenses paid by employers: 27 cents (26 cents for 2012) per kilometer.
The corresponding rate for taxpayers employed principally in selling or leasing automobiles: 24
cents (23 cents for 2012) per kilometer.

New maximum Canada Pension Plan (CPP) contribution limit and Employment Insurance (EI)
premium for 2013
Maximum CPP contribution limit: $2,356.20 ($2,307 for 2012) for each of the employer and the
employee.
Maximum EI premium: $1,247.57 ($1,176 for 2012) and $891.12 ($840 for 2012) for the
employer and the employee respectively.
Prescribed Federal interest rates for first three quarters of 2013
For overdue taxes, CPP contributions and EI premiums: 5%
For non-corporate taxpayer overpayments: 3%
For corporate taxpayer overpayments, calculation of taxable benefits for employees and
shareholders for certain loans: 1%
For spousal loans: 1%
Prescribed Federal interest rates for fourth quarter of 2013
For overdue taxes, CPP contributions and EI premiums: 6%
For non-corporate taxpayer overpayments: 4%

Chapter 1: US and Canada Tax Changes

Page 8 of 8
For corporate taxpayer overpayments, calculation of taxable benefits for employees and
shareholders for certain loans: 2%
For spousal loans: 2%
Prescribed Federal interest rates for first quarter of 2014
For overdue taxes, CPP contributions and EI premiums: 5%
For non-corporate taxpayer overpayments: 3%
For corporate taxpayer overpayments, calculation of taxable benefits for employees and
shareholders for certain loans: 1%
For spousal loans: 1%
Note: the interest rates above have decreased by 1% since last quarter
Updates on requirements for Forms T1135 and T1134
See separate chapter on disclosures
Phase-out of OETC and OED
See separate chapter.

Chapter 1 - Annexure A
Source: The 2014 Essential Tax and Wealth Planning Guide Deloitte US
These illustrations will serve to help you understand how the increased tax rates, the new Medicare taxes and PEP and
Pease limitations will affect certain taxpayers.
In all three illustrations, the taxpayers are New York State residents filing jointly, and have three children.

Illustration #1
Executive taxpayer facts:
Taxable W-2 wages of $200,000
Qualified dividends: $10,000
Long-term capital gain: $0
Itemized deductions
Charitable Contributions: $10,000
Mortgage Interest: $15,000
Property Taxes: $10,000
State Income Taxes: $12,000
2012 Tax
Year
Wages
Interest & Dividends
Total Income
Total Adjustments

Illustration #1 Results
Assuming the taxpayers earned the same
amount of income in 2012 and in 2013, they
would actually have a 2% reduction in taxes
from 2012 to 2013 of approximately $786
due to the following:

2013 Tax
Year
Difference

200,000

200,000

10,000

10,000

210,000

210,000

Adjusted Gross Income (AGI)

210,000

210,000

Personal Exemptions

19,000

19,500

Charitable Contributions

10,000

10,000

Taxes

22,000

22,000

Interest Expense

15,000

500

Itemized Deductions:

3% AGI Floor
Total Itemized

47,000

15,000

47,000

Total deductions from AGI

66,000

66,500

500

Taxable Income

144,000

143,500

(500)

27,060

26,733

(327)

6,515

6,156

(459)

33,675

32,889

Appropriate Regular Tax

Net Alternative Minimum Tax
Total Federal Taxes

(786)
-2% Decrease

Additional $500 of personal exemptions

(indexed for the inflation adjustment from
2012). Because the taxpayers AGI was
below the married filing joint phase-out
threshold of $300,000, they are not
subject to the PEP limitation and are
entitled to a full PEP deduction.
Reduction in regular income tax of
$327 due to the change in tax brackets
thanks to ATRA. In 2012, a taxpayer with
taxable income ranging from $142,700
to $217,450 was in the 28% rate bracket,
while in a 2013 the 25% bracket was
increased to range from $72,500 to
$146,400. In this illustration, the taxpayer
dropped to the higher end of the 25% rate
bracket for a small reduction.
Due to the inflation-increased AMT
exemption, less of this taxpayers income
was subject to AMT, resulting in a $459
reduction in AMT liability.

Chapter 1 - Annexure A
Source: The 2014 Essential Tax and Wealth Planning Guide Deloitte US
Illustration #2
Senior Level Executive taxpayer facts:
Taxable W-2 wages of $800,000
Qualified dividends: $50,000
Long-term capital gain: $75,000
Itemized deductions
Charitable Contributions: $80,000
Mortgage Interest: $35,000
Property Taxes: $40,000
State Income Taxes: $60,000
2012 Tax
Year

2013 Tax
Year
Difference

Income:
Wages
Interest & Dividends
Capital Gains & Losses
Total Income
Total Adjustments
AGI
Personal Exemptions

800,000

800,000

50,000

50,000

75,000

75,000

925,000

925,000

925,000

925,000

19,000

(19,000)

Itemized Deductions:
Charitable Contributions
Taxes
Interest Expense
3% AGI Floor

80,000

80,000

100,000

100,000

35,000
-

35,000

(18,750)

(18,750)

Total Itemized

215,000

196,250

(18,750)

Total deductions from AGI

234,000

196,250

(37,750)

Taxable Income

691,000

728,750

37,750

Appropriate Regular Tax

185,990

211,731

25,741

30,860

11,279

(19,581)

Net Alternative Minimum Tax

Net Investment Income Tax

4,469

4,469

Additional Medicare Tax

4,950

4,950

232,429

15,579

Total Federal Taxes

216,850

7% Increase

Illustration #2 Results
Assuming the taxpayer earned the same amount of income in 2012 and in
2013, the taxpayer would pay approximately 7% more, equal to $15,579 in
additional tax in 2013 due to the following:
Loss of $19,000 in personal exemptions due to the reinstatement of PEP
limitation.
Reduction of $18,750 in overall itemized deductions due to the
reinstatement of the 3% of AGI Pease limitation.
Increase in regular income tax of $25,741 due to increased ordinary income
tax rates and loss of deductions cited above. Note however, due to the
increase in regular tax, the AMT was reduced by $19,581. For a net increase
in total income tax of $6,160.
Additional tax of $4,950 of FICA-HI equal to 0.9% surtax on earned wages
in excess of $250,000.
Additional tax of $4,469 of net investment tax income equal to 3.8% on
investment income after allowable deductions (including allocable state
income taxes).

Chapter 1 - Annexure A
Source: The 2014 Essential Tax and Wealth Planning Guide Deloitte US
Illustration #3

Illustration #3 Results
Assuming the taxpayer earned the same amount of
income in 2012 and in 2013, the taxpayer would
pay approximately $136,413 in additional tax (29%
increase) in 2013 due to the following:

High-Net Worth Entrepreneur: taxpayer facts:

Net Self-Employment Income: $1,000,000
Qualified dividends: $500,000
Long-term capital gain: $1,000,000
Itemized deductions
Charitable Contributions: $250,000
Mortgage Interest: $0 (Paid off)
Property Taxes: $60,000
State Income Taxes: $208,000

Loss of $19,000 in personal exemptions due to the

reinstatement of PEP limitation.
Reduction of $65,387 in overall itemized
deductions due to the reinstatement of the 3% of
AGI Pease limitation.

2012 Tax
Year

2013 Tax
Year

1,000,000

1,000,000

500,000

500,000

Difference

Income:
Self-employment income
Interest & Dividends
Capital Gains & Losses

1,000,000

1,000,000

Total Income

2,500,000

2,500,000

Total Adjustments

(20,215)

(20,440)

(225)

AGI

2,479,785

2,479,560

Personal Exemptions

19,000

(225)
(19,000)

Itemized Deductions:
Charitable Contributions

250,000

250,000

Taxes

268,000

268,000

3% AGI Floor

(65,387)

(65,387)

Total Itemized

518,000

452,613

(65,387)

Total Deductions from AGI

537,000

452,613

(84,387)

Taxable Income

1,942,785

2,026,947

84,387

Appropriate Regular Tax

349,114

456,317

107,203

Net Alternative Minimum Tax

76,726

44,370

(32,356)

Self-Employment Tax

38,232

40,880

2,648

52,856

52,856

6,062

6,062

600,485

136,413

Net Investment Income Tax

Additional Medicare Tax

Total Federal Taxes

464,072

29% Increase

Increase in regular income tax of $107,203 due

to increased ordinary income tax rates and loss of
deductions cited above. Note however, due to the
increase in regular tax, the AMT was reduced by
$32,356. For a net increase in total income tax of
$74,847.
Increase in self-employment tax of $2,648 due
to the expiration of the payroll tax holiday and
inflation increase of maximum compensation
subject to FICA tax (increased from $110,100 in
2012 to $113,700 in 2013). However, this increase
also slightly increased the above-the-line deduction
for self-employment taxes.
Additional tax of $6,062 of FICA-HI equal to 0.9%
surtax on earned self-employment earnings in
excess of $250,000. Note that this is not deductible
for purposes of calculating self-employment tax.
Additional tax of $52,856 of net investment tax
income equal to 3.8% on investment income after
allowable deductions (including allocable state
income taxes).