The American Taxpayer Relief Act of 2012 (the Act), signed into law by President Obama on January 2, 2013, and the Patient Protection and Affordable Care Act (the healthcare law), enacted in 2010, may place an increased tax burden on highly compensated individuals. The Act, while keeping federal income tax rates the same for most Americans, significantly increased ordinary income, dividend, and capital gains tax rates for high income taxpayers. In addition, the Act reinstated the personal exemption phase-out and ‘Pease’ limitation on itemized deductions for high income taxpayers. Separately, the healthcare law included two tax rate increases that took effect as of January 1, 2013.
Deferring compensation is a very attractive enhanced wealth accumulation option given the potential for permanent tax savings coupled with the power of tax deferral and the possibility of lower marginal tax rates when the deferred compensation is eventually paid out. Accordingly, companies may want to consider the implementation of a qualified hybrid deferral plan, which can provide significant deferral opportunities for highly compensated employees.