New Year, New Tax Code
Welcome to 2013! As you no doubt saw on the news, Congress worked over New Year’s and passed H.R. 8, The American Taxpayer Relief Act of 2012. The Act is 157 pages long but Frazier & Deeter has summarized some of the key points.
Tax changes: The American Taxpayer Relief Act of 2012
The Act increases tax rates on the wealthy (defined as taxable income over $450,000 for married couples and $400,000 for singles), extends unemployment benefits; delays spending cuts; keeps the estate and gift tax exemption at $5 million but moves the tax rate to 40% (up from 35%); and increases tax rates on the wealthy again by phasing-out itemized deductions and personal tax exemptions in 2013 (for this purpose the wealthy are defined as taxable incomes over $300,000 for married couples and $250,000 for singles).
Other highlights (or lowlights) include the following:
- In 2013, the highest marginal tax rate is increased to 39.6% for the wealthy. All other tax brackets remain in place
- In 2013, tax rates are effectively increased on the wealthy by phasing out itemized deductions and personal exemptions. Wealthy is defined as incomes of $300,000 for couples of $250,000 for singles
- The alternative minimum tax (AMT) was permanently fixed for 2012 and all future years by increasing and indexing the AMT exemption. This will avert approximately 30 million taxpayers from being subject to AMT in 2012 and future years
- The estate and gift tax exemption will remain at $5,000,000 as indexed for inflation. The maximum estate and gift tax rate will increase from 35% to 40% and there are no provisions to do away with discounts, GRATs, and other estate planning strategies
- The maximum tax rates on long-term capital gains and qualified dividends will increase from 15% to 20% plus the new Obama Health Care Tax of 3.8% will apply to wealthy taxpayers with yet another definition of wealthy
- There is a five year extension for various credits including: The American Opportunity Credit, the Child Tax Credit, and the Earned Income Credit
- The cancellation of indebtedness provision for short sales for primary residences was extended through 2013
- The teacher “above the line” deduction for school supplies was extended for 2012 and 2013
- The deduction for PMI mortgage premiums paid was extended through 2013
- The deduction for Sales and Use taxes was extended for 2012 and 2013
- Qualified tuition deductions were extended for 2012 and 2013
- A real favorite, the Charitable IRA transfer of up to $100,000 for taxpayers 70.5 years of age and older, was extended for 2012 and 2013. Given the retroactive nature of this bill, taxpayers will have until February 1, 2013 to designate a charitable transfer and count it towards 2012 and any required minimum distribution rules thereof
- Another favorite, the R&D tax credit, was extended for 2012 and 2013 with new rules imposed on acquisitions of companies and the impact of qualifying R&D expenditures
- For businesses, the 50% bonus depreciation was extended through 2014 which should increase capital investment and spending
- Special definitions for Section 179 depreciation involving real estate and computer software were extended by the Act
- The built in gains (BIG) tax period for S-Corporations will remain at 5 years through 2013
- The 100% exclusion of gain on small business stock was extended through 2013
- Home energy and vehicle credits were extended through 2013
- Medicare physician payments were not cut and extended through 2013 with new rules set in place for 2014. The impact to doctors with the new rules will remain to be seen.
- The special 15 year straight line depreciation method for certain qualified leasehold improvements and restaurant property was extended through 2013
- Unemployment tax benefits were extended under the Act
- Perhaps most interesting of all, the entire sequester spending cuts (which were to take place across the board on January 1, 2013) were delayed until March 1, 2013.
Fiscal Cliff Part Two?
The spending cut delay is especially interesting in light of the fact that the government will run up against the debt ceiling (again) in the next 60 days. It appears we will have Fiscal Cliff #2 coming to a theater near you on March 1, 2013.
Stay tuned and let Frazier & Deeter help you understand how the changes will affect you and your family!!