Over the New Year’s weekend both houses of Congress voted to approve legislation that will avert the so-called “fiscal cliff”. President Obama will sign the legislation, but this is only the beginning of continued political debate on the nation’s debt and fiscal policies on which Rodefer Moss will keep you informed. The legislation does not include any spending cuts which will likely be the source of the next debate when the debt limit is up in a few months. There will clearly be more to come on that piece of the national debt conundrum.
For now, here are some of the highlights of the American Taxpayer Relief Act of 2012 that has passed in Congress:
Tax rates
The top tax rate will increase from 35 percent to 39.6 percent for single taxpayers with taxable adjusted gross income of more than $400,000 a year and married joint filers making more than $450,000 annually. The lower rates, commonly referred to as the Bush Tax Cuts, will continue to apply for taxpayers making less than those amounts. Additionally, the lower rates for lower income taxpayers are made permanent, as opposed to “sunsetting” the rates at a future date.
Exemptions, deductions cut
Taxpayers who make more than $250,000 (single), $275,000 (head of household) and $300,000 (jointly filing couples) will lose some of the value of their personal exemptions and itemized deductions. The personal exemption phaseout, or PEP, will reduce affected taxpayers’ exemption amounts by 2 percent. The “Pease” limitations will apply to itemized deductions for affected taxpayers, reducing their itemized deductions by 3% of the amount their taxable income exceeds the stated income thresholds, not to exceed 80% of otherwise allowable itemized deductions.
Investment income taxes
Beginning in 2013, the top tax rate on capital gains and qualified dividends is 20 percent for single taxpayers earning more than $400,000 a year and married jointly filing couples making more than $450,000 annually. For taxpayers who make less, the top tax rate on these investments remains at 15 percent. And those in the bottom two tax brackets (10 percent and 15 percent) would continue to owe no capital gains taxes. In addition, a 3.8% surtax will apply to those with taxable income over $200,000 for single filers and $250,000 for married joint filers.
Extenders extended
Most of the tax breaks that expire every year or so and are extended, earning them the name extenders, were renewed retroactively for 2012 as well as for 2013.
That means that on those years’ tax returns eligible filers can claim the above-the-line educator expense, higher education tuition and fees and student loan interest.
The itemized state and local sales tax deduction also was renewed.
Also renewed is the ability to take tax-free distributions from IRA’s and qualified retirement plans for charitable purposes. A special rule allows certain distributions made in 2013 to be deemed made as of December 31, 2012.
Estate tax
The estate tax was scheduled to apply in 2013 to estates valued at more than $1 million. That amount will be now be $5 million, but the tax rate on estates worth more than that will be taxed at 40 percent instead of the current 35 percent. This also is a permanent tax change.
Business taxes
Bonus depreciation, at the 2012 rate of 50 percent, has also been extended through 2013, and through 2014 for qualified aircraft and certain other property. Additionally, the increased expensing limitations under IRC Section 179, allowing certain long-lived property to be expensed rather than depreciated, have been extended through 2014.
Alternative Minimum Tax
Permanent AMT relief has been legislated, in that the AMT exemption has been restored to its 2012 level and will be indexed for inflation for years beginning after December 31, 2012. However, many taxpayers above the $200,000 and $250,000 taxable income levels, for single and married joint filers, respectively, will continue to be hit by the AMT.
As mentioned, these are some high points in the bill. The 157-page document keeps plenty of other tax provisions in place. Look for continued updates from Rodefer Moss on how this evolving story affects you. As always, we remain committed to keeping you informed on developments that affect your personal and business finances and taxes, both those that will affect your 2012 return due by April 15 as well as those you can use to minimize your 2013 taxes. We look forward to working with you in 2013 and beyond.
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