Approved: Taxpayer Relief

Lewitz, Balosie, Wollack, Rayner & Giroux, LLC

Certified Public Accountants

Newsletter

American Taxpayer Relief Act of 2012

January 2013

In This Issue

Provisions Impacting 2012

Provisions Impacting 2013

Off The Cliff?

Americans were left hanging in 2012 with much uncertainty. Financial advisers were forced to make recommendations based on guesswork. But the Act made many of the temporary tax provisions permanent, right? Well, permanent only means they don't have a fixed sunset that would require action to extend. A better description is "not temporary". Tax laws can be changed at any time with enough votes.

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Quick Reminders
For Businesses

The employee portion of FICA taxes has reverted back to 7.65% for payroll paid in 2013.

In general, businesses are required to issue a Form 1099 whenever they pay an unincorporated entity $600 or more for services performed. The form must be sent to the recipient by January 31st and to the IRS by February 28th. There are significant penalties for failing to file.

It wasn't until the very last moment that the so called "fiscal cliff" was averted. Should taxpayers be relieved? The question is, how will it affect you? As with all tax laws, this act is complicated and the impact will depend on your individual situation. This newsletter will give you the highlights of what to expect.

Provisions Impacting 2012

clock IRA Distributions to Charity: Special rules allow taxpayers 70 1/2 or older to recharacterize distributions to charity made in January 2013 as if made on December 31st or to treat a December distribution as a charitable distribution if transferred to the charity before February 1st. The provision for tax-free distributions directly to charities from IRAs has been extended through December 31, 2013.

Alternative Minimum Tax: The AMT exclusion was set at $45,000 for joint filers, but the Act increased the 2012 amount to $78,750 and indexed it for inflation going forward.

Teachers' Classroom Expense Deduction: This $250 deduction was retroactively put back in for 2012 and extended through 2013.

Provisions Impacting 2013

Tax Rates: The existing marginal rates of 10% through 35% are unchanged going forward, but a new 39.6% rate has been added for individual filers with taxable income over $400,000 and joint filers with taxable income over $450,000.

Long Term Capital Gains and Qualified Dividends: The Bush-era rates will continue, except for those taxpayers above the $400,000/$450,000 levels who will pay at 20%. The additional 3.8% tax on net investment income will start in 2013 as previously scheduled and will apply to individual filers above $200,000 and joint filers above $250,000. Therefore, the true effective top rate will be 23.8%.

Personal Exemptions: The phaseout of personal exemptions was allowed to come back into the tax code, but the income limits were increased. Affected taxpayers are joint filers above $300,000 and $250,000 for singles. The phaseout is 2% for each $2,500 above the threshold level.

Itemized Deductions: The Act revived the limitation on itemized deductions, but with the same higher thresholds as used for personal exemptions. Total itemized deductions cannot be reduced by more than 80%. Certain items, such as medical expenses and investment interest expense, are not subject to reduction. The previously scheduled threshold increase from 7.5% to 10% for medical expenses is still in place.

Child Tax Credit: This credit was scheduled to drop back to $500, but the Act kept it at $1,000 for each qualifying child.

Tuition Credit: The American Opportunity Tax Credit, which gives a 100% credit for the first $2,000 and 25% of the next $2,000 of tuition for qualified taxpayers, has been extended through 2017.

Cancellation of Indebtedness: The Act extends the exclusion from taxable income the cancellation of indebtedness income of qualified mortgage debts on a principle residence of up to $2 million through 2013.

Estate and Gift Taxes: On January 1, 2013, the federal applicable exclusion was scheduled to drop to $1 million and the top estate tax rate was to increase to 55%. The Act has set the maximum rate at 40% and established an inflation-adjusted exclusion of $5 million. The Act also made permanent the portability of the lifetime exclusion between spouses. This allows for the possibility of a surviving spouse to shelter over $10 million from federal estate taxes.

Business Taxes: The Code Section 179 deduction for capital acquisitions was scheduled to drop from $125,000 to $25,000 in 2013, but the Act extended the 2011 limit of $500,000 for both 2012 and 2013. The special 50% bonus depreciation deduction was extended through 2014.

A word of caution: this is a very brief summary and does not include all of the details that are included in the Act. Please contact us if you would like more information.

About Lewitz, Balosie, Wollack, Rayner & Giroux, LLC

Our five partners have over 150 years of combined professional experience. We provide accounting, tax and consulting services to individuals, businesses, nonprofit organizations, estates and trusts. Our services include tax return preparation, software consulting, and compilations, reviews and audits of financial statements. We have been located in the shoreline community of Old Saybrook, Connecticut for over 50 years. Feel free to contact us if we can be of service. We can be reached at 860-388-4451.

IRS Circular 230 Disclosure:

To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any tax advice contained in this communication, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.