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Tax Tips!
After weeks of negotiations, Congress finally passed
legislation to avert the tax side of the “fiscal cliff.” The
President signed the American Taxpayer Relief Act of 2012
into law on January 2, 2013.
Here is a summary of the major provisions of the new law.
Payroll tax rates
In 2011 and 2012, taxpayers enjoyed a “payroll tax holiday”
in the form of 2% lower social security taxes on wages and
self-employment earnings. The new law did not extend the
lower rate beyond 2012, and taxpayers will once again pay
social security tax at a 6.2%, not 4.2%, rate.
Income tax rates
The Bush-era tax rates are extended permanently. However,
for taxpayers whose taxable income exceeds $400,000
(single), $425,000 (head of household), $450,000 (married
filing joint), there is a new top tax rate of 39.6% on
income above those levels.
Capital gains and dividends
The new law also sets a 20% tax rate on long-term capital
gains and qualified dividends for those who fall into the
top 39.6% tax rate. All other taxpayers will continue with
the 2012 rates – 15% for most people and 0% for those in the
10% and 15% ordinary income brackets.
AMT
The alternative minimum tax (AMT) has a permanent “fix” that
is inflation adjusted annually and is retroactive to January
1, 2012. The 2012 exemption amounts are $50,600 (single) and
$78,750 (couples).
Deductions and exemptions
Itemized deductions and personal exemptions are limited or
phased out for higher-income taxpayers. For those with
adjusted gross income above $250,000 (single) and $300,000
(couples), deductions are reduced by 3% of the income over
the threshold, with an 80% limit on reductions. Personal
exemptions are phased out above the same income thresholds,
without the 80% cap.
Families
Several provisions affecting families were set to expire at
the end of 2012. The new law extends or makes permanent the
following credits:
* The child tax credit of $1,000 per qualifying child under
age 17.
* Enhancements to the earned income credit.
* The adoption credit and the income exclusion for
employer-paid or reimbursed adoption expenses, indexed
annually for inflation.
* The 35% credit for child and dependent care, with expenses
capped at $3,000 for one individual and $6,000 for two or
more.
Education tax breaks
The new law extends the American Opportunity Tax Credit,
with a $2,500 maximum credit, through 2017. The
above-the-line deduction for up to $4,000 of qualified
tuition and related expenses is made retroactive for 2012
and extended through 2013. The 60-month limit for deducting
up to $2,500 of student loan interest is permanently
eliminated. The maximum contribution allowed for Coverdell
education savings accounts is permanently set at $2,000 a
year. The exclusion from income for employer-provided
education assistance of up to $5,250 is made permanent.
“Extenders”
The new law once again extends a number of the individual
taxpayer “extenders” through 2013. The items include the
following: an optional deduction for state and local sales
tax in lieu of state and local income tax, the $250
deduction for classroom supplies paid by teachers, and the
IRA-to-charity transfer of up to $100,000 by taxpayers age
70½ or older.
Miscellaneous
The new law extends through 2013 the exclusion from income
for cancellation of mortgage debt of up to $2 million on a
principal residence. It allows for the deduction of mortgage
insurance premiums and the tax credit for making energy
improvements to a home.
Estate and gift tax
The estate tax exemption was scheduled to drop in 2013 to $1
million with a top tax rate of 55%. The new law permanently
sets the exemption at $5 million and sets the top tax rate
at 40%. The exemption will be adjusted annually for
inflation.
Business provisions
There are a number of provisions in the new law that will
affect businesses.
* The first-year expensing option (Section 179) was
increased retroactively for 2012 and extended through 2013
at $500,000 for new and used equipment. The investment limit
is set at $2,000,000.
* The 50% bonus depreciation was extended through 2013 and
applies only to new equipment.
* The research tax credit is extended through 2013.
* The Work Opportunity Tax Credit is extended through 2013.
This credit is available to businesses that hire individuals
from targeted groups, such as veterans.
* About two dozen more business “extenders” are available
for both 2012 and 2013 tax returns.
The American Taxpayer Relief Act of 2012 contains several
other provisions that could affect your personal and
business tax situation. Keep in mind that Congress will have
a very busy 2013 in addressing additional tax matters,
possibly including a complete overhaul of the income tax
code. Stay in touch with us for updates on what Congress is
doing. We are here to help you pay no more tax than the law
requires. Please contact us if you have questions on this
latest law.
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