Falling over the so-called “FISCAL CLIFF” (at least the tax ramifications part) has been avoided by the final votes by the Senate and House in the 13th hour before everyone returned from the New Years holiday. They passed the AMERICAN TAXPAYER RELIEF ACT OF 2012.
Many of the tax uncertainties that existed throughout 2012 have finally been resolved, at least for the 2012 tax- filing season. Even though some changes were labeled “permanent” we all know when it comes to taxes nothing is really permanent. With tax overhaul on the minds of all those in Congress we can only assume that the definition of “permanent” means “change is possible”.
Changes Effecting Individuals
SOCIAL SECURITY TAX
Social Security payroll tax holiday has been allowed to expire on January 1, 2013. The 6.2% Social Security tax deducted from employee wages was reduced to 4.2% for the past two years. As of January 1, 2013 the rate goes back up to 6.2%. The Self Employment rate on self employed persons also increased as of January 1st.
INDIVIDUAL INCOME TAX RATES
Although President Obama campaigned on the promise of maintaining the “Bush-era” tax rates for singles and married couples for those having incomes under $200,000 & $250,000 respectively, a compromise was reached to maintain rates at the $400,000 & $450,000 levels for singles & married couples. Those have incomes above these levels will see their top tax rates increase from 35% to 39.6% as they were under President Clinton’s years’ in office. These new rates are effective for years after 2012.
PHASEOUT OF ITEMIZED DEDUCTIONS & PERSONAL EXEMPTIONS
High-income taxpayers will once again find limitations on the amount of itemized deductions and personal exemptions they will be allowed to deduct from income, as was the case prior to 2010. Starting after 2012 and thereafter there will be a reduction to itemized deductions and personal exemptions when income thresholds levels reach $250,000 for singles, and $300,000 for married couples filing jointly. These income threshold levels will be adjusted annually for inflation.
CAPITAL GAINS AND DIVIDENDS
The top tax rate on long-term capital gains and qualified dividends will remain at 15% after 2012 for those taxpayers with income levels under $400,000 for singles and $450,000 for married couples filing jointly. For those taxpayers with incomes above these threshold levels the top rate increases to 20% after 2012.
ALTERNATIVE MINIMUM TAX
Alternative Minimum Tax (AMT) was enacted many years ago to ensure high-income taxpayers paid at least some tax even though they were able to take advantageous of many techniques to avoid regular income taxes. The original law allowed an exemption amount to be deducted to arrive at Alternative Taxable Income. The amounts were set at $33,750 for singles and $45,000 for married couples filing jointly. The exemption amounts were not automatically allowed to increase for inflation each year. Congress has had to “patch” the exemption amount each year for inflation and the exemption amount reverted back to the original amounts at the beginning of each year. The American Taxpayer Relief Act of 2012 now permanently indexes the exemption amount for inflation each year. The exemption amounts for 2012 are now set at $50,600 for singles and $78,750 for married couples filing jointly.
NEW 3.8% MEDICARE TAX
Under the Affordable Care Act (“Obamacare”) starting in 2013 a new 3.8% Medicare tax will apply to investment and “unearned income”. The new tax will apply to the lesser of a taxpayer(s) net investment income or the excess of a taxpayer(s) modified adjusted gross income over $200,000 for single taxpayers and $250,000 for married couples filing jointly.
Also under the Affordable Care Act a new 0.9% Medicare tax will apply to high-wage earners whose wages exceed $200,000 for singles and $250,000 for married couples filing jointly. The new 0.9% Medicare tax will apply to wages paid in excess of the threshold amounts stated. Therefore the Medicare tax withheld on the first $200,000 or $250,000 of wages will be at the rate of 1.45% and wages paid above those limits will be subject to withholding at the rate of 2.35%.
ESTATE & GIFT TAXES
The American Taxpayer Relief Act permanently provides for a maximum Federal estate tax rate of 40% with a $5 million dollar exclusion that will be adjusted annually for inflation.
The Act also makes permanent “portablilty” between spouses.
TAX CREDITS & DEDUCTIONS
The American taxpayer Relief Act of 2012 extends, permanently the following tax credits:
- Child tax credit – $1,000
- Earned Income Credit – Permanent to 2017
- Adoption Credit
- Child & Dependent Care Credit
- Employer-Provided Child Care Credit
- American Opportunity Tax Credit – Extended to 2017
- Deduction for Qualified Tuition & Related expenses (retroactive)
- Student Loan Interest Deduction
- Exclusion of Cancellation of Indebtedness on principal Residence
Changes Effecting Businesses
CODE SECTION 179 DEDUCTION
The American Taxpayers Relief Act of 2012 extends through 2013 small businesses to expense certain property acquisitions of up to $500,000 when total investments don’t exceed $2 million. Also business will continue to be allowed to expense off the shelf computer software through 2013.
The Act extends the 50% bonus depreciation through 2013
The Act extends the following business credits:
- Research Tax credit
- Work Opportunity Tax Credit
QUALIFIED LEASEHOLD/RETAIL IMPROVEMENT, RESTAURANTS
The Act extends through 2013 the 15-year write off for qualified leasehold improvements, qualified retail improvements and qualified restaurant property.
As always with tax laws, PERMANENT does not necessarily mean permanent! Both Democrats and Republicans are looking forward to tackling an overhaul of the tax code, which, if accomplished, could result in many changes that could alter, eliminate or change many of the above items.
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