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IRS announces inflation adjustment for 2013

The Internal Revenue Service (IRS) announced the various inflation adjustments that take effect this year. Of the changes that will affect the most taxpayers, the personal exemption increased to $3,900, up from the 2012 exemption of $3,800.

According to Bloomberg, the budget deal passed by Congress on January 1 that avoided the fiscal cliff "made permanent the estate- and gift-tax exclusions and indexed them for inflation so they will increase over time." For the estate and gift tax, the IRS announced the basic exclusion has been increased to $5.25 million for 2013, up from $5.12 million for those who died last year.

The IRS has also created a new tax rate of 39.6 percent for individuals making more than $400,000, ($450,000 for married couples), an increase of 1.6 percent. They have capped itemized deductions and the personal exemption now phases out for individuals earning more than $250,000 and couples with income above $300,000.

Another significant change involves the Alternative Minimum Tax (ATM) exemption. Congress finally made the permanent fix to the alternative minimum tax exemption by indexing it for inflation.

Congress has passed numerous "patches" over the years, but had failed to properly index the exemption to prevent millions of taxpayers from being captured by the tax, as their incomes increased due to inflation.

With these and other tax changes, there's bound to be confusion and mistakes with income tax filings. If you are subjected to an audit or other IRS investigation, be sure to contact a tax attorney for representation.

These matters can become very complex quickly and inadvertent errors are easy to make and expensive to fix.

Source:, "IRS Increases Exemption From Estate Tax to $5.25 Million," Margaret Collins, January 11, 2013

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