What the new tax law means to you

Congress finally passed a tax bill to avoid the fiscal cliff at the last minute (actually past the last minute).  This new bill has lots of provisions and most people want to know how it is going to affect them.  Unless your AGI is over $250,000 it is not likely that you will notice much difference from the laws that were in effect prior to 2012.  This is because most of the bill simply extended the law that was scheduled to expire.

 

There are a few changes that will increase taxes for some people.  Those are:

 

A .9% increase on Medicare taxes for couples who make over $250,000. 

 

An additional Medicare tax of 3.8% on investment income of couples who make over $250,000.  This is only on investment income which includes, interest, dividends, annuities, royalties and rent.  Passive business income is also considered investment income for this tax.

 

The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% to 10% of adjusted gross income.  If you are or your spouse is over 65 then the threshold remains at 7.5%.

 

The maximum amount of salary reduction contributions to a health flexible spending arrangement is changed to $2,500.

 

Provisions that were extended or made permanent include:

Individual tax rates

All the individual marginal tax rates under EGTRRA and JGTRRA are retained (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, $425,000 for head-of-household filers and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).

Phase-out of itemized deductions and personal exemptions

The personal exemptions and itemized deductions phase-out is reinstated at a higher threshold of $250,000 for single taxpayers; $275,000 for heads of household; and $300,000 for married taxpayers filing jointly.

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.

Estate and gift tax

The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective January 1st 2013. The estate tax “portability” election, under which if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, and made permanent by the act.

Permanent extensions

Various temporary tax provisions were made permanent. These include:

  • Marriage penalty relief
  • The liberalized child and dependent care credit rules
  • Expanded adoption credit and adoption-assistance programs
  • The exclusion for employer-provided educational assistance
  • The employer-provided child care 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
  • Tax-free distributions from individual retirement plans for charitable purposes 

Individual credits expired at the end of 2012

The American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2017. In addition, the bill permanently extends a rule excluding from taxable income refunds from certain federal and federally assisted programs.

These are by no means the only provisions of the law change, but they represent the ones that have the broadest effect.

Posted in Tax Issues | Tagged , , , , , , , | Leave a comment

Filing of tax returns has been delayed by the IRS

Because of Congress waiting until January 2, 2013 to pass the American Taxpayer Relief Act of 2012, the IRS has pushed back the date that they will accept tax returns.

Most basic individual income tax returns can be filed beginning on January 30, 2013.  Some returns will not be able to be filed until February or even March depending on forms that need to be revised due to the law changes.

The IRS has not given a date that they will start accepting business returns yet.  As soon as we have more information, we will post it.

Do not stop the accumulation of documents to be used in preparing your tax return because of these delays.  We will still be able to start working on your return and have it ready when the IRS starts accepting tax returns this year.

Posted in Tax Issues | Tagged , , , | Leave a comment

House Sends Fiscal Cliff Tax Relief Bill to White House

A day of intense negotiating among House Republican lawmakers on January 1 led to the late-evening passage of the American Taxpayer Relief Act of 2012 (HR 8 ) by a vote of 257 to 167. Disgruntled Republicans, including House Majority Leader Eric Cantor, R-Va., had sought to amend the $3.9-trillion tax-cut measure to include a package of spending cuts. However, GOP lawmakers abandoned that plan when it became evident they lacked enough support from members of their own party. The GOP amendment would likely have killed the bill, which President Barack Obama has promised to sign.

 

Senate lawmakers passed HR 8 by a vote of 89 to 8 in the early morning hours of January 1, following a last-minute agreement reached between Senate Minority Leader Mitch McConnell, R-Ky., and Vice President Biden. The Joint Committee on Taxation estimated that the legislation would lower federal revenues by $3.9 trillion over the next 10 years. The legislation would avert the dire consequences from the so-called fiscal cliff of expiring Bush-era tax cuts and the imposition of spending cuts enacted by the Budget Control Act of 2011 (P.L. 112-25 ). Although Congress missed the January 1 deadline for action, lawmakers were determined to act before the U.S. stock markets opened following the New Year’s Day holiday.

 

HR 8 would extend the Bush-era tax cuts for individuals earning under $400,000 annually and $450,000 for couples, set the estate tax rate at 40 percent, with an exemption for estates valued under $5 million, provide a permanent patch for the alternative minimum tax (AMT), and tax dividends and capital gains at 20 percent for individuals earning over $400,000 and couples with an income over $450,000.

 

In addition, the plan would extend through 2013 business tax breaks, including the research and experimentation credit and the production tax credit, and extend personal tax credits including the child care, college tuition and the Earned Income Tax Credit for five years. The legislation also delays the budget sequestration spending cuts for two months and extends long-term unemployment insurance benefits for one year.

 

Democrats supported passage of the tax legislation, but several predicted that GOP lawmakers would use debate over raising the federal debt limit in February to attempt to pass deeper spending cuts. GOP lawmakers said the lack of spending cuts in HR 8 could send a message to the markets that Washington is not willing to address the deficit, and could lead to a lower credit rating.

As more information comes available on this bill, we will post it.

 

  Please call our office if you have any questions on this at 317 574-4280

Posted in Tax Issues | Tagged , , , , , , , | Leave a comment

2013 401(K) Limits

If you participate in your employer’s 401(k) plan, the contribution limit has been increased to $17,500 for the year 2013.  If you are over the age of 50, you can contribute an additional $5,500 bringing your total allowable contribution to $23,000 for the year 2013.  Since the new year is about to start, now is the time to adjust your 401(k) withholding if you want to make the maximum contributions.   These limits also apply to 403(b) and 457 plans as well.

Posted in Payroll taxes, Tax Issues | Tagged , , , , , , | Leave a comment

Social Security Wage Base

The government recently announced the Social Security wage base for 2013 will be $113,700.  This is an increase from the 2012 wage base of $110,100 in 2012.  Once a person reaches this income limit, they no longer have to pay soicial security taxes on their wages.  However, income above this limit is still subject to Medicare taxes, which have no annual limit.

Posted in Payroll taxes, Tax Issues | Tagged , , , , , | Leave a comment