Boris Benic and Associates LLP - Certified Public Accountants and Consultants - Garden City, Long Island, New York

Boris Benic and Associates LLP - Certified Public Accountants and Consultants - Garden City, Long Island, New York

   
Resources - Tax Center - Boris Benic and Associates LLP - Certified Public Accountants and Consultants - Garden City, Long Island, New York
     
 

American Taxpayer Relief Act of 2012

 
 

On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (The Act). The new law avoids severe tax increases that were scheduled to come into effect in 2013 via the expiration of several Bush-era tax credits and extensions. Beyond this there were several changes made to tax rules and regulations that will impact many clients’ family and individual tax situations. As a result, Boris Benic & Associates has provided a summary of the most important aspects of the new law. It’s important to note however that the information listed below has no impact on 2012 taxes. It only applies to the 2013 tax year and beyond.

 

Major Tax Provision Changes

The Act provided new tax rates for individuals and addressed many of the expiring estate and gift tax benefits that taxpayers were concerned about. Below we have provided a list of the major changes implemented by the new tax law. These include:

  • Income Tax Increase – The Act increases the total amount of income tax paid from 35% to 39.6% to individuals with a taxable income of $400,000 or more per year ($450,000 for joint filers and $425,000 for heads of household).  All tax brackets used in calculating 2012 individual taxes will remain the same with the exception of the new 39.6% high income bracket.

  • Dividends & Capital Gains Tax – The Act increases the amount families and individuals will pay on dividends and capital gains taxes. Taxpayers with $400,000 in income ($450,000 joint) will now be taxed at 20% which represents a 5% increase over the 2012 rate of 15%.

  • Itemized Deductions limitation- The Act provides for a limitation on Itemized deduction. The threshold is $300,000 for joint filers and $250,000 for singles. The total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds the threshold amounts, with the reduction not to exceed 80% of otherwise allowable itemized deductions.

  • Payroll Tax Holiday – The Act did not extend the 2% reduction in payroll taxes for social security.

  • Personal Exemption Phase-out (PEP) – The Act revives the Personal Exemption Phase-out but using applicable income levels that are slightly higher than in the past. The new income levels include $300,000 for married couples, $275,000 for heads of household, $250,000 for unmarried taxpayers and $150,000 for married taxpayers filing separately.

  • Permanent AMT Relief – For tax years beginning in 2012, the Act permanently increases these exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married couples filing separated. Additionally, retroactive to 2012 these exemptions are indexed for inflation.

  • Estate & Gift Tax Exemption – The Act allows for a $5 million exemption (adjusted for inflation) for individual dying or gifts made after 2012. The top estate and gift tax rate was permanently increased from 35% to 40%.

  • Estate Tax Portability – The Act permanently extends the portability feature that allows the estate of the first spouse to die to transfer the unused exclusion to the surviving spouse.

  • Unemployment Benefits – The Act temporarily extends long term unemployment benefits through the end of 2013.

Key Business Tax Provisions

As a result of the new legislation, several key business tax provisions were extended through the 2013 tax year. Below we have highlighted the most prominent that will have the most impact on clients. These include:

  • Section 179d Expensing – The Act extends the enhanced Section 179d small business expensing benefit. The dollar limit for 2012 and 2013 is $500,000 with a $2M investment limit. The rule allowing for off the shelf computer software is also extended. The extension postpones the significant reduction in benefits until after the 2013 tax year.

  • Bonus Depreciation – The Act extends the 50% bonus depreciation through the 2013 tax year. This means any qualifying property purchased and placed into service before 1/1/14 is eligible for the benefit.

  • Research Tax Credit – The Act extends this tax credit which originally expired at the end of 2011. The Research Tax Credit rewards companies that increase qualifying business research and development expenses or for increases in payments to universities for basic research. The extension applies to the 2013 tax year only.

  • Work Opportunity Tax Credit – The Act extends this tax credit through the 2013 tax year. This means that companies hiring individuals from targeted groups are eligible for a credit generally equal to 40% of the first year wages up to $6,000.

  • Qualified Leasehold Improvements – The Act extends this tax benefit through the 2013 tax year. Property owners and leaseholders are still able to take advantage of the 15 year recovery period for qualified leasehold improvements, qualified retail improvements and qualified restaurant property. 

  • New Markets Tax Credit – The Act extends this tax benefit for two additional years allowing for $3.5 billion dollars of New Markets Tax Credit authority in each year. This will extension will continue to encourage private investment in low income urban and rural areas that lack access to needed capital. The tax credit provides a 39% federal tax credit for qualifying investments.

  • 100% Exclusion on Gain or Sale of Small Business Stock - The Act extends this tax benefit through the end of 2013. The extension continues to allow investors to continue to receive the 100% from tax gains on qualified business stock held for at least five years.

  • Empowerment Zone – The Act extends the tax benefits to business operating within certain economically depressed “empowerment zones” through the 2013 tax year. Such tax incentives include the 20% wage credit, liberalized Section 179d expensing riles, tax-exempt bond financing and capital gains tax deferral on the sales of qualified assets sold and replaced.

Key Individual Tax Provisions

There were a number of popular individual tax provisions that were schedule to expire or revert to a much less favorable rate. Below we have highlighted the most prominent that will have the widest impact on clients. These include:

  •  Marriage Penalty Relief – The Act extends all categories of marriage penalty relief.

  • Earned Income Credit – The Act makes permanent the enhancements to the Earned Income Credit. These enhancements include the simplified definition of earned income, revised relationship test and tie breaking rules. The bottom line is easier access to claiming the credit.

  • Mortgage Insurance Premiums – The Act extends through 2013 the ability to treat mortgage insurance premiums as deductible interest.

  • Coverdell Education Savings Accounts – The Act extends permanently Bush-era enhancements to these saving accounts. The impacted enhancements include a $2,000 maximum contribution amount and treatment of elementary, secondary and university expenses as qualifying expenses.

  • IRA Distributions to Charity – The Act extends through 2013 the provision allowing tax free distributions from individual retirement accounts to public charities for individuals age 70 ½ and older (a maximum of $100,000 per year).

  • Child & Dependent Care Credit – The Act permanently extends Bush-era enhancements to this credit. The 35% credit rate was made permanent along with a $3,000 cap on expenses for one qualifying individual and a $6,000 cap on expenses for two or more qualifying individuals.

  • Child Tax Credit – The Act permanently extended the $1,000 child tax credit.

  • Student Loan Interest Deduction – The Act permanently extends the suspension of the 60 month rule for the $2,500 above-the-line student loan interest deduction.

Contact Us

The American Taxpayer Relief Act of 2012 is very comprehensive and all aspects of the legislations could not be covered in a single article. There are many business and individual tax incentives that should be reviewed as part of your 2013 tax planning strategy. For additional information on how these changes will impact your situation, contact Boris Benic, CPA, at 516.248.7361, or click here to email Boris. In a comprehensive consultation he can assess your situation and determine the best way to proceed.

 

 
 

Boris Benic and Associates LLP - Certified Public Accountants and Consultants - Garden City, Long Island, New York

 

Boris Benic and Associates LLP - Certified Public Accountants and Consultants - Garden City, Long Island, New York