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A Fiscal Cliff Deal Emerges:
A list of key details in the agreement. |
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Greetings!
Before providing the details of the new tax law, which is generally good news except for certain high-income individual taxpayers, a provision that is not in the Act that will increase taxes for all wage earners and self-employed taxpayers is the expiration of the reduction in social security taxes from 6.2% to 4.2%. Beginning in 2013 the rate will revert to 6.2%. Also, long-term unemployment benefits will be sustained through the end of 2013.
"The American Taxpayer Relief Act" awaits the President's signature. The major provisions include the following: |
Tax Rates Beginning in 2013 the tax rates for individuals will stay a t 10%, 15%, 25%, 28%, 33% and 35%. A new top rate of 39.6% is imposed on taxable income over 400,000 for single filers, and 450,000 for married taxpayers filing jointly. |
Phaseout of itemized deductions and personal exemptions The personal exemptions and itemized deductions phaseout is reinstated at a higher threshold of 250,000 for single taxpayers, and 300,000 for married taxpayers filing jointly. Under the phase-out, the amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced 2% for each 2,500 by which the taxpayer's adjusted gross income exceeds the applicable threshold. For the itemized deductions, the total amount is reduced by 3% of the amount by which the taxpayer's AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. |
Capital Gains and Dividends A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15 % brackets. |
Alternative Minimum Tax The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are 78,750 for married taxpayers filing jointly and 50,600 for single filers. Relief from AMT for nonrefundable credits is retained. |
Estate and gift tax provisions For estate, gift, and generations-skipping transfer tax purposes, for individuals dying and gifts made after 2012, there is a 5 million exemption (adjusted for inflation), and the top estate, gift and GST rate is permanently increased from 35% to 40%. |
Permanent extensions Various temporary tax provisions enacted as part of EGTRRA (the "Bush-era tax cuts") were made permanent. These include:
- Marriage penalty relief, i.e. the widening of the brackets and increased standard deduction for married taxpayers filing jointly;
- The liberalized child and dependent care credit rules;
- The exclusion for employer-provided educational assistance;
- The employer-provided child care credit
- The higher contribution amount for Coverdell education savings accounts
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Individual credits expired at the end of 2012 now extended The American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2018. Other credits and items from the American Recovery and Reinvestment Act of 2009 that were extended for the same five-year period include enhanced provisions of the child tax credit and the earned income tax credit. |
Individual provisions expired at the end of 2011 The Act also extended through 2013 a number of temporary individual tax provisions, most of which expired at the end of 2011:
- Deduction for certain expenses of elementary and secondary school teachers;
- Exclusion from gross income of discharge of qualified principal residence indebtedness;
- Mortgage insurance premiums treated as qualified residence interest;
- Deduction of state and local general sales taxes;
- Above-the-line deduction for qualified tuition and related expenses;
- Tax-free distributions from individual retirement plans for charitable purposes.
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Business tax extenders Notably, the credit for increasing research and development has been extended through 2013. The increased expensing amounts under section 179 are extended through 2013. The availability of an additional 50% first-year bonus depreciation was also extended for one year. It now generally applies to property placed in service before January 1, 2014. Other business provisions extended through 2013 include:
- Employer wage credit for employees who are active duty members of the uniformed services;
- Work opportunity tax credit;
- Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements;
- Enhanced charitable deduction for contributions of food inventory;
- Temporary exclusion of 100% of gain on certain small business stock
- Basis adjustments to stock of S corporations making charitable contributions of property;
- Reduction in S corporation recognition period for built-in gains tax.
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Energy tax extenders A number of energy credits and provisions that expired at the end of 2011 have been extended through 2013, as follows;
- Credit for energy-efficient existing homes;
- Credit for energy-efficient new homes;
- Credit for energy-efficient appliances;
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New taxes In addition to the various provisions discussed above, some new taxes also took effect Jan. 1 as a result of 2010's health care reform legislation. |
Additional hospital insurance tax on high-income taxpayers. The employee portion of the hospital insurance tax part of FICA, normally 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer's spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.
For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount. |
Medicare tax on investment income. Starting Jan. 1, Sec. 1411 imposes a tax on individuals equal to 3.8% of the lesser of the individual's net investment income for the year or the amount the individual's modified adjusted gross income (AGI) exceeds a threshold amount. For estates and trusts, the tax equals 3.8% of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins.
For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000; for married taxpayers filing separately, it is $125,000; and for other individuals it is $200,000.
Net investment income means investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, annuities, royalties, and rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business. However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income. |
Medical care itemized deduction threshold. The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013-2016, if either the taxpayer or the taxpayer's spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI. |
Flexible spending arrangement. Effective for cafeteria plan years beginning after Dec. 31, 2012, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement for any plan year is $2,500. |
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If you have questions about anything in this article or any other financial issue give us a call at 314-884-4000.
Purk & Associates, P.C.
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