Resolution to a tax deal as we neared the end of 2012 seemed to be distance event. But many U.S. taxpayers were shocked to discover that at 2:00a.m. the morning of January 1, a deal was approved by the US Senate and then passed the next day by the House. With the signature of the President happening on January 3, 2013, the 2012 Taxpayer Relief Act became law. Tax benefits that expired on 12/31/11 have been re-instated and extended.
1Income tax rates for most individuals will remain at the pre-2013 level. Exception – for those whose earning equal the joint filer threshold of $450,000, a rate o 39.6% will kick in.
2Married joint filers will continue to be recognized as the equivalent of 2 single filers. That means the 15.% tax bracket will be 200% of the single filer tax bracket instead of a return to a lesser percentage of 167%.
3For the past 2 years wage earners have experienced a 2.0% reduction in their FICA tax, which have been withheld from their paychecks. That holiday ends at the conclusion of 2012, when it reverts to the previous percentage of 6.2%. For household with $60,000 of wage income, that means a reduction of $1,200 of available funds to spend/save.
4The Alternative Minimum Tax or AMT. AMT was invented many years ago as a way to keep the rich from dodging taxes. What seemed like a pretty good idea at the time became a problem in the future as the rules that govern AMT didn’t keep pace with inflation. As a result middle-class families were starting to be drawn into paying AMT (a higher rate than normal). Congress knew that middle-class Americans wouldn’t like the idea of paying higher taxes so every year they’d pass a temporary measure that would keep most middle-class Americans from having to pay the higher AMT rate. A permanent fix is now part of the new law. Without being part of the new law, an estimated 30,000,000 taxpayers were going to be impacted by the adverse impact of that tax. The Act permanently increases the AMT exemption amount to $50,600 for unmarried filers and $78,750 for joint filers. This is retroactive for tax years after 2011; and will be indexed for inflation. The inclusion of this change is in itself a reason for millions of taxpayers to breath a collective sigh of relief.
5Capital Gains and Dividend income: Taxpayers whose ordinary income is generally taxed at a rate below 25% will see no change as the unearned income will carry a 0.0% rate; those tax payers subject to the higher tax brackets will be taxed at 20.%. For those falling in the highest tax bracket there will be a surcharged of 3.8%, which changes their overall rate for capital gains and dividends to 23.8%
6Extended for 5 years: Child Tax Credit with modified qualifying rules; Earned Income Tax Credit remains, again with modifications and The American Opportunity tax credit remains in place. Credit granted is equal to 100% of the first $2000 of qualified tuition and related expenses plus 25% of the next $2000. This is allowed for the first 4 years of post-secondary education.
7 of indebtedness income from qualified principal residence debt has been extended for 1 year. Limitation: $2 million dollars for married couple filing a joint return.
8Above the line adjustments (listed on first page of Form 1040 that reduce gross income) extended: 2012 and 2013 for educators expenses; higher education expenses for same period of time – 2012 and 2013.
9Reinstatement of Non-Taxable IRA transfers to eligible charitable entities. Tax free distributions up to $100,000 per year has been reinstated and extended through 2013. One can contribute during January 2013 and have it treated as though made on December 31, 2012. The Act permits one to treat any portion of a distribution from an IRA to the taxpayer during December as a qualified contribution provided the portion is transferred in cash to the eligible charity.
10BUSINESS RELATED: The ACT reinstates and extends for 2 years numerous tax breaks such as Code Section 179 expensing. It also provides a 1 year extension of 50. % bonus first-year depreciation. Plus many other extensions.
We realize you’ve probably already heard this news. But we want you to know that over the coming weeks and months we’ll be studying the new law looking for every opportunity to help you save. And of course, if you have questions, don’t hesitate to call us at 717-859-5555.