The recently enacted 2012 American Taxpayer Relief Act is a sweeping tax package that includes, among many other items, permanent extension of the Bush-era tax cuts for most taxpayers, revised tax rates on ordinary and capital gain income for high-income individuals, modification of the estate tax, permanent relief from the AMT for individual taxpayers, limits on the deductions and exemptions of high-income individuals, and a host of retroactively resuscitated and extended tax breaks for individual and businesses. Here’s a look at the key elements of the package:
- Tax rates. For tax years beginning after 2012, the 10%, 15%, 25%, 28%, 33% and 35% tax brackets from the Bush tax cuts will remain in place and are made permanent. This means that, for most Americans, the tax rates will stay the same. However, there will be a new 39.6% rate, which will begin at the following thresholds: $400,000 (single), $425,000 (head of household), $450,000 (joint filers and qualifying widow(er)s), and $225,000 (married filing separately). These dollar amounts will be inflation-adjusted for tax years after 2013.
- Estate tax. The new law prevents steep increases in estate, gift and generation-skipping transfer (GST) tax that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation). However, the new law also permanently increases the top estate, gift, and GST rate from 35% to 40% It also continues the portability feature that allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse. All changes are effective fore individuals dying and gifts made after 2012.
- Capital gains and qualified dividends rates. The new law retains the 0% tax rate on long-term capital gains and qualified dividends, modifies the 15% rate, and establishes a new 20% rate. Beginning in 2013, the rate will be 0% if income falls below the 25% tax bracket; 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate; and 20% if income falls in the 39.6% tax bracket. It should be noted that the 20% top rate does not include the new 3.8% surtax on investment-type income and gains for tax years beginning after 2012, which applies on investment income above $200,000 (single) and $250,000 (joint filers) in adjusted gross income. So actually, the top rate for capital gains and dividends beginning in 2013 will be 23.8% if income falls in the 39.6% tax bracket. For lower income levels, the tax will be 0%, 15%, or 18.8%.
- Personal exemption phaseout. Beginning in 2013, personal exemptions will be phased out (i.e., reduced) for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers). Taxpayers claim exemptions for themselves, their spouses and their dependents. Last year, each exemption was worth $3,800.
- Itemized deduction limitation. Beginning in 2013, itemized deductions will be limited for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers).
- AMT relief. The new law provides permanent alternative minimum tax (AMT) relief. Prior to the Act, the individual AMT exemption amounts for 2012 were to have been $33,750 for unmarried taxpayers, $45,000 for joint filers, and $22,500 for married persons filing separately. Retroactively effective for tax years beginning after 2011, the new law permanently increases these exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. In addition, for tax years beginning after 2012, it indexes these exemption amounts for inflation.
- Tax credits for low to middle wage earners. The new law extends for five years the following items that were originally enacted as part of the 2009 stimulus package and were slated to expire at the end of 2012: (1) the American Opportunity tax credit, which provides up to $2,500 in refundable tax credits for undergraduate college education; (2) eased rules for qualifying for the refundable child credit; and (3) various earned income tax credit (EITC) changes.
- Cost recovery. The new law extends increased expensing limitations and treatment of certain real property as Code Section 179 property. It also extends and modifies the bonus depreciation provisions with respect to property placed in service after Dec. 31, 2012, in tax years ending after that date.
- Tax break extenders. Many of the “traditional” tax extenders are extended for two years, retroactively to 2012 and through the end of 2013. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes, the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers, and the research credit.
- Pension provision. For transfers after Dec. 31, 2012, in tax years ending after that date, plan provision in an applicable retirement plan (which includes a qualified Roth contribution program) can allow participants to elect to transfer amounts to designated Roth accounts with the transfer being treated as a taxable qualified rollover contribution.
- Payroll tax cut is no more. The 2% payroll tax cut was allowed to expire at the end of 2012.
I hope this information is helpful. If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call..
We recently received the following news from the Massachusetts Society of Certified Public Accountants;
“The Society received word from some members whose clients have received notices from the IRS regarding income not properly reported. This income is linked to Roth IRA conversions from 2010. These notices were sent despite the fact that the income had been properly reported. Anyone with clients reporting a similar situation should resend Form 8606 for the year in question, stating that the income was reported correctly and in compliance with applicable rules. We will keep you updated on any further developments.”
As always, if you receive a tax notice from one of the governing authorities please forward it to our office so that we can assist you.
Congress passed an extension of the 2% payroll tax cut that had been scheduled to expire at the end of February. The extension means 160 million working Americans will continue to pay social security tax on their wages at a 4.2% rate for the rest of 2012, rather than at a 6.2% rate.
Because Republicans and Democrats were unable to agree on how to pay for the extended tax cut, the law included no spending cuts to offset the estimated $93 billion cost of this provision.
The law also provides for long-term federal unemployment benefits, setting the maximum at 73 weeks in states with the worst unemployment and 63 weeks for other states.
Another provision in the law includes the so-called “doc fix” that prevents a scheduled 27% reduction in Medicare payments to doctors.
The unemployment benefits and doctor payments will be paid for by government sales of broadband spectrum, requiring federal workers hired after this year to contribute more to their pensions, and cuts in certain health programs.
© copyright – Mostad & Christensen, Inc.
Dave Lorenzi CPA
Senator Tom Coburn, R-Oklahoma, is proposing budget cuts that would reduce spending by $9 trillion over the next 10 years. Admittedly, this plan has little chance of coming to fruition. But what are interesting ideas for certain tax cuts do seem to be gaining steam with law makers. Under the Senator’s plan, tax rates would remain the same as they are today, but many deductions would be eliminated, easing taxpayer’s into higher brackets. Although some of his cuts would be in niche areas like eliminating tax breaks for auto race tracks, hockey arenas and Eskimo whaling captains, others will hit home for more of the general public. For instance, he would eliminate the mortgage interest deduction on vacation homes and limit the deduction on homes worth over $500,000. There has been more talk coming out of Washington regarding these sorts of cuts recently. We will keep you posted for how any tax cuts could affect you.
Maureen C. Conway, CPA, MST
In response to rising gasoline prices, the IRS has raised the standard mileage rate for business use of an automobile from 51 cents per mile to 55½ per mile, effective July 1, 2011 . The medical and moving standard mileage rate is increasing to 23½ per mile, also on July 1, 2011.
The new optional standard mileage rates will apply until superseded by future guidance and can be used by taxpayers to calculate the deductible costs of operating an automobile. Alternatively, taxpayers can instead use their actual costs, but must maintain adequate records and be able to substantiate their expenses.
The standard mileage rate for services to charitable organizations is set by statute at 14 cents per mile and remains unchanged by Thursday’s announcement.
The standard mileage rate for expenses incurred before July 1, 2011 is 51 cents per mile for business use and 19 cents per mileage for medical and moving expenses.
Scott Gallagher, CPA
Greetings and Welcome to my initial blog post on small business software applications. This blog will comment on various topics involving small business software such as Quickbooks Pro and Premier, Peachtree Accounting (although I’ll admit I am partial to Quickbooks over Peachtree for various reasons), Microsoft Office Applications, and more. My name is Scott Gallagher, and I am a Quickbooks Proadvisor and C.P.A. with over 13 years experience in public accounting (the majority of which has been with small businesses).
Examples of more specific topics to be covered in future posts may be subjects like Peachtree vs. Quickbooks, Most Common Errors in Quickbooks, Proper Usage of Quickbooks for Accurate Accrual and Cash Reports, Explanation of specific Microsoft Excel Functions (thousands to choose from, but so few used), as well as topics suggested by readers. I have actually learned the most from others approaching me with questions, so strongly encourage requests from readers for future topics.
Thank you for your interest, and I look forward to your future feedback!