Highlight of the American Taxpayer Relief Act

February 8, 2013


By: Marc Whitfield, CPA, CFST, MBA - Tax Manager

Now that the so called “fiscal cliff” is avoided, let’s take a look at what changes were finally made (stay tuned for round 2 in February).  The American Taxpayer Relief Act of 2012 was finally passed on January 1, what does that mean, besides Congress finally passing something worthwhile?   Many provisions set to expire were reinstated for 2012, 2013 and beyond.  Tax rates are now no longer an unknown and the AMT patch will no longer need to be patched every December as Congress, in their infinite wisdom, decided to index it for inflation. 

One key way to lower your adjusted gross income, which will be important, as many provisions and credits phase out at certain AGI thresholds, is a transfers from your IRA’s to qualified charities for 2013.  If you have to take a distribution and you gift to charity, this is an excellent way to reduce your AGI since the distribution is not included in your taxable income up to the amount of the donation.  You do not get to take a charitable contribution since that would be double dipping, and the IRS, as well as others frown on double dipping. 

What wasn’t extended was the lower FICA tax rate we enjoyed for the last two years so everyone will be getting a little less in their pay in 2013.

Income Tax Rates, Capital Gains and Dividends

For those of you fortunate enough to make over $400,000 (single) or $450,000(married), you are going to be paying a bit more in tax.  The new act make permanent the lower Bush-era tax rates for all, except for you lucky ones.  The rates will be 10%, 15%, 25%, 28%, 33%, 35% and the new 39.6% bracket for AGI over $400,000 if single or $450,000 for married filing jointly. 

Qualified dividends, which were set to rise to as high as 39.6%, will now be permanently capped at 20%, but only for those in the 39.6% bracket.  All others will continue to enjoy the lower rates of 0% and 15%, depending on what tax bracket you fall in to.  Same for capital gains.

Personal Exemption and Itemized Deduction Phaseouts

Prior to 2010, personal exemptions and itemized deductions were limited if taxpayer’s AGI exceed certain thresholds.  We enjoyed 2 years of no phaseouts starting in 2011, and now its back, but the thresholds are higher, starting at $250,000 (singles) and $300,000 (married filing jointly).

Child Tax Credit

Good news for those of you with children.   The child tax credit, which was set to revert down to $500, was permanently extended to $1,000 for those below the phaseout.

Section 179 Expensing and Bonus Deprecation

If you own a business the Act retroactively changes the limits for Section 179 expensing to $500,000 with a $2 million investment limit for 2012 and 2013.  Without the Act, expensing limits would have been $125,000 with a $500,000 limit in 2012, dropping to $25,000 with a $200,000 limit in 2013.

50% Bonus depreciation was also extended through 2013 on new assets placed in service by December 31, 2013.  Therefore, you get an automatic deduction of at least 50% for every new capital asset you buy.

Other Extenders

Many other tax extenders were set to expire on December 31, 2012, but were extended once again.

State and Local Sales tax Deduction has been extended for two years.  The American Opportunity Tax Credit is extended through 2017.  The deduction for Qualified Tuition and Related Expenses was extended until December 31, 2013.  Suspension of the 60-month rule for student loan interest deduction was made permanent.  Coverdell ESA’s will stay at a maximum contribution of $2,000.  These are just some of the changes in the American Taxpayer Relief Act set to take place in 2013. 

Also taking effect in 2013 from the prior healthcare act are Medicare Payroll Tax on High Wage Earners and Medicare Tax on Net Investment Income.

Medicare Payroll Tax on High Wage Earners

Starting in 2013, a new .9% additional payroll tax will be due on individuals making over $200,000 and joint filers making over $250,000 in wages.  Employers will be required to withhold the additional tax on employees making over $200,000.   The tax will actually be calculated on individuals’ tax returns.  You may end up owing the tax if, for example each spouse has $150,000 in wages, since the employer would not be required to withhold the additional tax on either.

Medicare Tax on Net Investment Income

Starting in 2013, there is a new 3.8% Medicare surtax on net investment income which applies to the lesser of (i) an individuals “net investment income” and (ii) the excess of the individuals modified AGI over $200,000 if single or $250,000 if married filing jointly.

If your AGI is under the threshold amounts, you will not be subject to the surtax at all.  If your AGI exceeds those thresholds, you have opportunities to minimize the surtax with proper tax planning.

You got all that right?  As always this is a lot of information to digest, please feel free to contact me with any additional questions at 1-855-STROEMER or information@stroemercpa.com.

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