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Nine Tips on Deducting Charitable Contributions

Tuesday, April 2nd, 2013 by Moore McLaughlin

Giving to charity may make you feel good and help you lower your tax bill. The IRS offers these nine tips to help ensure your contributions pay off on your tax return.

1. If you want a tax deduction, you must donate to a qualified charitable organization. You cannot deduct contributions you make to either an individual, a political organization or a political candidate

2. You must file Form 1040 and itemize your deductions on Schedule A. If your total deduction for all noncash contributions for the year is more than $500, you must also file Form 8283, Noncash Charitable Contributions, with your tax return.

3. If you receive a benefit of some kind in return for your contribution, you can only deduct the amount that exceeds the fair market value of the benefit you received. Examples of benefits you may receive in return for your contribution include merchandise, tickets to an event or other goods and services.

4. Donations of stock or other non-cash property are usually valued at fair market value. Used clothing and household items generally must be in good condition to be deductible. Special rules apply to vehicle donations.

5. Fair market value is generally the price at which someone can sell the property.

6. You must have a written record about your donation in order to deduct any cash gift, regardless of the amount. Cash contributions include those made by check or other monetary methods. That written record can be a written statement from the organization, a bank record or a payroll deduction record that substantiates your donation. That documentation should include the name of the organization, the date and amount of the contribution. A telephone bill meets this requirement for text donations if it shows this same information.

7. To claim a deduction for gifts of cash or property worth $250 or more, you must have a written statement from the qualified organization. The statement must show the amount of the cash or a description of any property given. It must also state whether the organization provided any goods or services in exchange for the gift.

8. You may use the same document to meet the requirement for a written statement for cash gifts and the requirement for a written acknowledgement for contributions of $250 or more.

9. If you donate one item or a group of similar items that are valued at more than $5,000, you must also complete Section B of Form 8283. This section generally requires an appraisal by a qualified appraiser.

For more information on charitable contributions, see Publication 526, Charitable Contributions. For information about noncash contributions, see Publication 561, Determining the Value of Donated Property. Forms and publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

  • Publication 526 , Charitable Contributions
  • Publication 561 , Determining the Value of Donated Property
  • Schedule A , Itemized Deductions
  • Form 8283 , Noncash Charitable Contributions

IRS YouTube Videos:

  • Fair Market Value of Charitable Donations – English | Spanish | ASL
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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning, Self-directed IRAs, Tax Current Events and News, Tax planning

Don’t Miss the Health Insurance Deduction if You’re Self-Employed

Friday, March 29th, 2013 by Moore McLaughlin

If you are self-employed, the IRS wants you to know about a tax deduction generally available to people who are self-employed.

The deduction is for medical, dental or long-term care insurance premiums that self-employed people often pay for themselves, their spouse and their dependents. The insurance can also cover your child who was under age 27 at the end of 2012, even if the child was not your dependent.

You may be able to take this deduction if one of the following applies to you:

  • You had a net profit from self-employment. You would report this on a Schedule C, Profit or Loss From Business, Schedule C-EZ, Net Profit From Business, or Schedule F, Profit or Loss From Farming.
  • You had self-employment earnings as a partner reported to you on Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc.
  • You used an optional method to figure your net earnings from self-employment on Schedule SE, Self-Employment Tax.
  • You were paid wages reported on Form W-2, Wage and Tax Statement, as a shareholder who owns more than two percent of the outstanding stock of an S corporation.
  • There are also some rules that apply to how the insurance plan is established. Follow these guidelines to make sure the plan qualifies:
  • If you’re self-employed and file Schedule C, C-EZ, or F, the policy can be in your name or in your business’ name.
  • If you’re a partner, the policy can be in your name or the partnership’s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the partnership must reimburse you and include the premiums as income on your Schedule K-1.
  • If you’re an S corporation shareholder, the policy can be in your name or the S corporation’s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the S corporation must reimburse you and include the premiums as wage income on your Form W-2.

For more information, see Publication 535, Business Expenses. It’s available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

  • Publication 535, Business Expenses
  • Publication 225, Farmer’s Tax Guide
  • Schedule C, Profit or Loss From Business
  • Schedule C-EZ, Net Profit From Business
  • Schedule F, Profit or Loss From Farming
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Posted in Asset Protection Planning, Current Events, Elderlaw/Law For Life, Estate Planning, IRS and state tax collections, Self-directed IRAs, Tax Current Events and News, Tax planning

Important Facts about Mortgage Debt Forgiveness

Wednesday, March 13th, 2013 by Moore McLaughlin

If your lender cancelled or forgave your mortgage debt, you generally have to pay tax on that amount. But there are exceptions to this rule for some homeowners who had mortgage debt forgiven in 2012.

Here are 10 key facts from the IRS about mortgage debt forgiveness:

1. Cancelled debt normally results in taxable income. However, you may be able to exclude the cancelled debt from your income if the debt was a mortgage on your main home.

2. To qualify, you must have used the debt to buy, build or substantially improve your principal residence. The residence must also secure the mortgage.

3. The maximum qualified debt that you can exclude under this exception is $2 million. The limit is $1 million for a married person who files a separate tax return.

4. You may be able to exclude from income the amount of mortgage debt reduced through mortgage restructuring. You may also be able to exclude mortgage debt cancelled in a foreclosure.

5. You may also qualify for the exclusion on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. The exclusion is limited to the amount of the old mortgage principal just before the refinancing.

6. Proceeds of refinanced mortgage debt used for other purposes do not qualify for the exclusion. For example, debt used to pay off credit card debt does not qualify.

7. If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Submit the completed form with your federal income tax return.

8. Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit cards or car loans. In some cases, other tax relief provisions may apply, such as debts discharged in certain bankruptcy proceedings. Form 982 provides more details about these provisions.

9. If your lender reduced or cancelled at least $600 of your mortgage debt, they normally send you a statement in January of the next year. Form 1099-C, Cancellation of Debt, shows the amount of cancelled debt and the fair market value of any foreclosed property.

10. Check your Form 1099-C for the cancelled debt amount shown in Box 2, and the value of your home shown in Box 7. Notify the lender immediately of any incorrect information so they can correct the form.

Use the Interactive Tax Assistant tool on IRS.gov to check if your cancelled debt is taxable. Also, see Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. IRS forms and publications are available online at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

  • Interactive Tax Assistant tool
  • Publication 4681 , Canceled Debts, Foreclosures, Repossessions and Abandonments
  • Mortgage Forgiveness Debt Relief Act and Debt Cancellation
  • Form 982 , Reduction of Tax Attributes Due to Discharge of Indebtedness

IRS YouTube Videos:

  • Mortgage Debt Forgiveness – English | Spanish | ASL
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Posted in 1031 Exchanges, Asset Protection Planning, Bankruptcy, Current Events, Estate Planning, IRS and state tax collections, Tax Current Events and News, Tax planning

Ten Facts about Capital Gains and Losses

Friday, March 8th, 2013 by Moore McLaughlin

The term “capital asset” for tax purposes applies to almost everything you own and use for personal or investment purposes. A capital gain or loss occurs when you sell a capital asset.

Here are 10 facts from the IRS on capital gains and losses:

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. Capital assets include your home, household furnishings, and stocks and bonds that you hold as investments.

2. A capital gain or loss is the difference between your basis of an asset and the amount you receive when you sell it. Your basis is usually what you paid for the asset.

3. You must include all capital gains in your income.

4. You may deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of personal-use property.

5. Capital gains and losses are long-term or short-term, depending on how long you hold on to the property. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.

6. If your long-term gains exceed your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a ‘net capital gain.’

7. The tax rates that apply to net capital gains are generally lower than the tax rates that apply to other types of income. The maximum capital gains rate for most people in 2012 is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of their net capital gains. Rates of 25 or 28 percent can also apply to special types of net capital gains.

8. If your capital losses are greater than your capital gains, you can deduct the difference between the two on your tax return. The annual limit on this deduction is $3,000, or $1,500 if you are married filing separately.

9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they occurred that year.

10. Form 8949, Sales and Other Dispositions of Capital Assets, will help you calculate capital gains and losses. You will carry over the subtotals from this form to Schedule D, Capital Gains and Losses. If you e-file your tax return, the software will do this for you.

For more information about capital gains and losses, see the Schedule D instructions or Publication 550, Investment Income and Expenses. They are both available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

  • Form 8949, Sales and Other Dispositions of Capital Assets
  • Schedule D, Capital Gains and Losses and instructions
  • Publication 550, Investment Income and Expenses
  • Publication 544, Sales and Other Dispositions of Assets
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Posted in 1031 Exchanges, Asset Protection Planning, Estate Planning, Self-directed IRAs, Tax Current Events and News, Tax planning

Seven Important Tax Facts about Medical and Dental Expenses

Tuesday, March 5th, 2013 by Moore McLaughlin

If you paid for medical or dental expenses in 2012, you may be able to get a tax deduction for costs not covered by insurance. The IRS wants you to know these seven facts about claiming the medical and dental expense deduction.

1. You must itemize. You can only claim medical and dental expenses for costs not covered by insurance if you itemize deductions on your tax return. You cannot claim medical and dental expenses if you take the standard deduction.

2. Deduction is limited. You can deduct medical and dental expenses that are more than 7.5 percent of your adjusted gross income.

3. Expenses paid in 2012. You can include medical and dental costs that you paid in 2012, even if you received the services in a previous year. Keep good records to show the amount that you paid.

4. Qualifying expenses. You may include most medical or dental costs that you paid for yourself, your spouse and your dependents. Some exceptions and special rules apply. Visit IRS.gov for more details.

5. Costs to include. You can normally claim the costs of diagnosing, treating, easing or preventing disease. The costs of prescription drugs and insulin qualify. The cost of medical, dental and some long-term care insurance also qualify.

6. Travel is included. You may be able to claim the cost of travel to obtain medical care. That includes the cost of public transportation or an ambulance as well as tolls and parking fees. If you use your car for medical travel, you can deduct the actual costs, including gas and oil. Instead of deducting the actual costs, you can deduct the standard mileage rate for medical travel, which is 23 cents per mile for 2012.

7. No double benefit. Funds from Health Savings Accounts or Flexible Spending Arrangements used to pay for medical or dental costs are usually tax-free. Therefore, you cannot deduct expenses paid with funds from those plans.

You’ll find more information in IRS Publication 502, Medical and Dental Expenses. Also see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. They are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

  • Publication 502, Medical and Dental Expenses
  • Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans

IRS YouTube Videos:

  • Medical and Dental Expenses – English | Spanish | ASL

IRS Podcasts:

  • Medical and Dental Expenses – English | Spanish
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Posted in Estate Planning, Tax Current Events and News, Tax planning

2012 American Taxpayer Relief Act—Education Incentives

Tuesday, January 15th, 2013 by Moore McLaughlin

In an eleventh hour agreement to avert the fiscal cliff, Congress passed the American Taxpayer Relief Act of 2012 (American Taxpayer Relief Act) which modifies and makes permanent many of the Bush-era tax cuts, and extends other popular, but temporary, taxpayer-friendly incentives. The “Bush-era” tax cuts refer to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).

Overall, the American Taxpayer Relief Act makes changes that affect almost all taxpayers. As a taxpayer with college age dependents, or who has reported tuition expense in the past, you may be interested in the education incentives covered under the American Taxpayer Relief Act.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) rewards qualified taxpayers with a credit of 100 percent of the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000, for a total maximum credit of $2,500 per eligible student. Additionally, the AOTC applies to the first four years of a student’s post-secondary education. The AOTC is an enhanced, but temporary version of the permanent HOPE credit. The HOPE credit, in contrast, is less generous than the AOTC and applies only to the first two years of post-secondary education. Fortunately, the American Taxpayer Relief Act extends the AOTC through 2017.

Deduction for Qualified Tuition and Related Expenses

The American Taxpayer Relief Act extends until December 31, 2013 the above-the-line deduction for qualified tuition and related expenses. The bill also extends the deduction retroactively for the 2012 tax year.

The above-the-line deduction for higher education tuition and related expenses expired after 2011. The higher education tuition deduction was created by EGTRRA and extended by subsequent laws, most recently by the 2010 Tax Relief Act, but only through the end of 2011. In 2011, the last year in which the deduction was available under current law, the deduction reached a maximum of $4,000 for taxpayers whose modified AGI did not exceed $65,000 ($130,000 for joint filers), and $2,000 for taxpayers whose modified AGI exceeded $65,000 but did not exceed $80,000 ($160,000 for joint filers).

Taxpayers cannot claim the higher education tuition deduction in the same tax year that they claim the AOTC or the Lifetime Learning credit. A taxpayer also cannot claim the education tuition deduction if anyone else claims the AOTC or the Lifetime Learning credit for the student in the same tax year.

Student Loan Interest Deduction

The American Taxpayer Relief Act permanently suspends the 60-month rule for the $2,500 above-the-line student loan interest deduction. The American Taxpayer Relief Act also expands the modified adjusted gross income range for phaseout of the deduction permanently and repeals the restriction that makes voluntary payments of interest nondeductible permanently.

Coverdell Education Savings Accounts

The American Taxpayer Relief Act extends permanently Bush-era enhancements to Coverdell education savings accounts (Coverdell ESAs). These enhancements include a $2,000 maximum contribution amount and treatment of elementary and secondary school expenses as well as post-secondary expenses as qualified expenditures. Without the American Taxpayer Relief Act, the maximum contribution amount to a Coverdell ESA was scheduled to significantly decrease from $2,000 to $500 after 2012.

Under the American Taxpayer Relief Act, qualified educational expenses for a Coverdell Education Savings Account continue to include expenses incurred while attending an elementary, secondary or post-secondary school.

Employer-Provided Education Assistance

The American Taxpayer Relief Act extends permanently the exclusion from income and employment taxes of employer-provided education assistance up to $5,250. The employer may also deduct up to $5,250 annually for qualified education expenses paid on behalf of an employee.

Federal Scholarships

The American Taxpayer Relief Act makes permanent the exclusion from income for the National Health Service Corps Scholarship Program and the Armed Forces Scholarship Program.

If you have any questions related to these education incentives or to the American Taxpayer Relief Act, please call our office for an appointment. We will be happy to assist you.

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Posted in Asset Protection Planning, Current Events, Estate Planning, Self-directed IRAs, Tax Current Events and News, Tax planning

2012 American Taxpayer Relief Act—Tax-Free IRA Distributions

Tuesday, January 15th, 2013 by Moore McLaughlin

The American Taxpayer Relief Act of 2012 (2012 Taxpayer Relief Act) extends through 2013 the provision which allows individuals who are at least 70½ by the end of the year to exclude from gross income qualified charitable distributions up to $100,000 from a traditional or Roth IRA that would otherwise be included in income. Married individuals filing a joint return are allowed to exclude a maximum of $200,000 for these distributions ($100,000 per individual IRA owner).

Congress waited until it was too late to make a 2012 qualified charitable distribution before extending the benefit, so it provided two forms of relief. First, you may elect to treat a qualified charitable distribution made in January of 2013 as having been made on December 31, 2012. Second, you may treat any portion of a distribution made in December 2012 as a qualified charitable distribution if it is transferred to a qualified charity in January of 2013. When these relief provisions are properly executed, the distribution made or transferred in January 2013 counts toward the $100,000 exclusion limitation and the required minimum distribution for the 2012 calendar year.

A review of your tax return indicates that you may be eligible to take advantage of these opportunities. As you may know, IRA owners must either withdraw the entire balance or start receiving periodic distributions from their traditional IRAs by April 1 of the year following the year in which they reach age 70-½. The minimum distribution that is required each year is computed by dividing the IRA account balance as of the close of business on December 31 of the preceding year by the applicable life expectancy. An IRA owner who does not make the required withdrawals may be subject to a 50-percent excise tax on the amount not withdrawn.

Many taxpayers like you, who receive taxable distributions, also contribute to charitable organizations. You can reduce your taxable income by excluding up to $100,000 of your IRA distribution from gross income when you transfer it directly to a charitable organization. This exclusion is available for taxable Roth IRA distributions as well as minimum required distributions from a traditional IRA.

Although a charitable contribution may be motivated by humanitarian reasons rather than by tax considerations, it is, nevertheless, wise to take tax considerations into account when making a contribution. Since this distribution must be made by the IRA trustee directly to a qualified (i.e., 50-percent) charitable organization, you should review your charitable tax giving as soon as possible. Please call our office at your earliest convenience to discuss this option.

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Posted in Asset Protection Planning, Current Events, Elderlaw/Law For Life, Estate Planning, Self-directed IRAs, Tax Current Events and News, Tax planning

2012 American Taxpayer Relief Act—Alternative Minimum Tax

Tuesday, January 15th, 2013 by Moore McLaughlin

As you know, the alternative minimum tax (AMT) traps more middle income taxpayers every year. To partially alleviate this tax burden, Congress has been enacting annual “patches” to the AMT to increase exemption amounts. The American Taxpayer Relief Act of 2012 (2012 Taxpayer Relief Act) provides immediate relief for the AMT by permanently increasing the AMT exemption amounts retroactive to the 2012 tax year. Beginning in 2013, these base AMT exemption amounts will be adjusted annually for inflation.

For 2012, the exemption amounts are increased to $78,750 for married couples filing jointly and surviving spouses, $50,600 for single taxpayers and heads of households, and $39,375 for married individuals filing separately.

The AMT exemption amounts are phased out at certain income levels. Because the phase-out calculation is affected by the amount of the exemption, an increase in the exemption also increases the maximum amount of alternative minimum taxable income (AMTI) a person can have before the exemption is phased out. Although the exemption amounts have increased, the threshold levels for calculating the phase-out remain unchanged in 2012. However, beginning in 2013 the threshold levels will also be inflation-adjusted.

For 2012, the AMT exemption amounts are completely phased out when AMTI reaches $465,000 for married couples filing jointly and surviving spouses, $314,900 for single taxpayers and heads of households, and $232,500 for married individuals filing separately.

Additionally, the nonrefundable personal tax credits offset rule is made permanent after 2011by the 2012 Taxpayer Relief Act. Therefore, these credits can be offset against regular tax and AMT liability, after reduction for any foreign tax credit.

With more certainty on the AMT horizon, tax planning strategies can be used to reduce its impact. As a general rule, taxpayers subject to the AMT should accelerate income into AMT years and postpone deductions into non-AMT years. We believe that a thorough analysis of your current and projected tax situation could minimize or eliminate your exposure to AMT liability. Please contact our office to make an appointment at your earliest convenience.

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Posted in Asset Protection Planning, Current Events, Elderlaw/Law For Life, Estate Planning, IRS and state tax collections, Tax Current Events and News, Tax planning

2012 American Taxpayer Relief Act—Transfer Taxes

Tuesday, January 15th, 2013 by Moore McLaughlin

The American Taxpayer Relief Act of 2012 (2012 Taxpayer Relief Act) permanently extends and modifies changes made to the law by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act). The 2012 Taxpayer Relief Act permanently provides for a maximum federal estate tax rate of 40 percent with an annually inflation-adjusted $5 million exclusion for estates of decedents dying after December 31, 2012; and a 40-percent tax rate and a unified estate and gift tax exclusion of $5 million, also adjusted for inflation, for gifts made after 2012. The generation-skipping transfer (GST) tax rate, which is tied to the maximum estate tax rate, is also 40 percent.

In addition, the 2012 Taxpayer Relief Act extends the deduction for state death taxes, and a number of provisions affecting qualified conservation easements, qualified family-owned business interests, the installment payment of estate tax for closely-held businesses, and repeal of the five-percent surtax on estates larger than $10 million. Also, the portability between spouses is made permanent.

Summary of Major Changes to Transfer Taxes in 2013 Resulting from the Extension and Modification of EGTRRA and the 2010 Tax Relief Act

  • ·         Maximum estate, gift, and GST tax rate is 40 percent.
  • ·         Five-percent surtax on large estates and gifts in excess of $10 million up to $17,184,000 will not be imposed on the estates of decedents dying or gifts made in 2013 or later.
  • ·         Applicable exclusion amount for estate and gift taxes is $5 million (adjusted for inflation to $5,120,000 in 2012).
  • ·         Exemption amount for GST tax is $5 million (adjusted for inflation to $5,120,000 in 2012).
  • ·         State death tax credit is permanently repealed and the state death tax deduction is extended.
  • ·         Qualified family-owned business interest deduction is permanently repealed.
  • ·         Modifications to the exclusion for qualified conservation easements are permanently extended.
  • ·         Portability of the deceased spousal unused exclusion amount for estate and gift tax purposes is made permanent. Portability allows the estate of a decedent who is survived by a spouse to make a portability election to permit the surviving spouse to apply the decedent’s unused exclusion to the surviving spouse’s own transfers during life and at death.

If Congress had not acted on the sunset provisions, effective January 1, 2013, the maximum federal estate tax rate was scheduled to revert to 55 percent with an applicable exclusion amount of $1 million (not indexed for inflation). The 2012 Taxpayer Relief Act brings some certainty to the Tax Code related to transfer taxes that has been controversial over the last few years. If you have any questions related to the 2012 Taxpayer Relief Act or how the new law affects your estate planning needs, please call our office for an appointment. We will be happy to assist you.

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Posted in 1031 Exchanges, Asset Protection Planning, Current Events, Elderlaw/Law For Life, Estate Planning, Self-directed IRAs, Tax Current Events and News, Tax planning

2012 American Taxpayer Relief Act — Overview

Friday, January 4th, 2013 by Moore McLaughlin

After weeks, indeed months of proposals and counter-proposals, seemingly endless negotiations and down-to-the-wire drama, Congress has passed legislation to avert the tax side of the so-called “fiscal cliff.” The American Taxpayer Relief Act permanently extends the Bush-era tax cuts for lower and moderate income taxpayers, permanently “patches” the alternative minimum tax (AMT), provides for a permanent 40 percent federal estate tax rate, renews many individual, business and energy tax extenders, and more. In one immediately noticeable effect, the American Taxpayer Relief Act does not extend the 2012 employee-side payroll tax holiday.

 

The American Taxpayer Relief Act is intended to bring some certainty to the Tax Code. At the same time, it sets stage for comprehensive tax reform, possibly in 2013.

 

Individuals

 

Unlike the two-year extension of the Bush-era tax cuts enacted in 2010, the debate in 2012 took place in a very different political and economic climate. If Congress did nothing, tax rates were scheduled to increase for all taxpayers at all income levels after 2012.  President Obama made it clear that he would veto any bill that extended the Bush-era tax cuts for higher income individuals. The President’s veto threat gained weight after his re-election.  Both the White House and the GOP realized that going over the fiscal cliff would jeopardize the economic recovery, and the American Taxpayer Relief Act is, for the moment, their best compromise.

 

Tax rates.  The American Taxpayer Relief Act extends permanently the Bush-era income tax rates for all taxpayers except for taxpayers with taxable income above certain thresholds:

$400,000 for single individuals, $450,000 for married couples filing joint returns, and $425,000 for heads of households.  For 2013 and beyond, the federal income tax rates are 10, 15, 25, 28, 33, 35, and 39.6 percent.  In comparison, the top rate before 2013 was 35 percent.  The IRS is expected to issue revised income tax withholding tables to reflect the 2013 rates as quickly as possible and provide guidance to employers and self-employed individuals.

 

Additionally, the new law revives the Pease limitation on itemized deductions and personal exemption phaseout (PEP) after 2012 for higher income individuals but at revised thresholds. The new thresholds for being subject to both the Pease limitation and PEP after 2012 are $300,000 for married couples and surviving spouses, $275,000 for heads of households, $250,000 for unmarried taxpayers; and $150,000 for married couples filing separate returns.

 

Capital gains.  The taxpayer-friendly Bush-era capital gains and dividend tax rates are modified by the American Taxpayer Relief Act. Generally, the new law increases the top rate for qualified capital gains and dividends to 20 percent (the Bush-era top rate was 15 percent). The 20 percent rate will apply to the extent that a taxpayer’s income exceeds the $400,000/$425,000/$450,000 thresholds discussed above. The 15 percent Bush-era tax rate will continue to apply to all other taxpayers (in some cases zero percent for qualified taxpayers within the 15-percent-or-lower income tax bracket).

 

Payroll tax cut.  The employee-side payroll tax holiday is not extended. Before 2013, the employee-share of OASDI taxes was reduced by two percentage points from 6.2 percent to 4.2 percent up the Social Security wage base (with a similar tax break for self-employed individuals).  For 2013, two percent reduction is no longer available and the employee-share of OASDI taxes reverts to 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent. In 2012, the payroll tax holiday could save a taxpayer up to $2,202 (taxpayers earning at or above the Social Security wage base for 2012).  As a result of the expiration of the payroll tax holiday, everyone who receives a paycheck or self-employment income will see an increase in taxes in 2013.

 

AMT. In recent years, Congress routinely “patched” the AMT to prevent its encroachment on middle income taxpayers. The American Taxpayer Relief Act patches permanently the AMT by giving taxpayers higher exemption amounts and other targeted relief. This relief is available beginning in 2012 and going forward. The permanent patch is expected to provide some certainty to planning for the AMT. No single factor automatically triggers AMT liability but some common factors are itemized deductions for state and local income taxes; itemized deductions for miscellaneous expenditures, itemized deductions on home equity loan interest (not including interest on a loan to build, buy or improve a residence); and changes in income from installment sales. Our office can help you gauge if you may be liable for the AMT in 2013 or future years.

 

Child tax credit and related incentives.  The popular $1,000 child tax credit was scheduled to revert to $500 per qualifying child after 2012.  Additional enhancements to the child tax credit also were scheduled to expire after 2012.  The American Taxpayer Relief Act makes permanent the $1,000 child tax credit. Most of the Bush-era enhancements are also made permanent or extended. Along with the child tax credit, the new law makes permanent the enhanced adoption credit/and income exclusion; the enhanced child and dependent care credit and the Bush-era credit for employer-provided child care facilities and services.

 

Education incentives.  A number of popular education tax incentives are extended or made permanent by the American Taxpayer Relief Act.  The American Opportunity Tax Credit (an enhanced version of the Hope education credit) is extended through 2017.  Enhancements to Coverdell education savings accounts, such as the $2,000 maximum contribution, are made permanent.  The student loan interest deduction is made more attractive by the permanent suspension of its 60-month rules (which had been scheduled to return after 2012). The new law also extends permanently the exclusion from income and employment taxes of employer-provided education assistance up to $5,250 and the exclusion from income for certain military scholarship programs.  Additionally, the above-the-line higher education tuition deduction is extended through 2013 as is the teachers’ classroom expense deduction.

 

Charitable giving.  Congress has long used the tax laws to encourage charitable giving.  The American Taxpayer Relief Act extends a popular charitable giving incentive through 2013:  tax-free IRA distributions to charity by individuals age 70 ½ and older up to maximum of $100,000 for qualified taxpayer per year.  A special transition rule allows individuals to recharacterize distributions made in January 2013 as made on December 31, 2012.  The new law also extends for businesses the enhanced deduction for charitable contributions of food inventory.

 

Federal estate tax.  Few issues have complicated family wealth planning in recent years as has the federal estate tax.  Recent laws have changed the maximum estate tax rate multiple times. Most recently, the 2010 Taxpayer Relief Act set the maximum estate tax rate at 35 percent with an inflation-adjusted exclusion of $5 million for estates of decedents dying before 2013. Effective January 1, 2013, the maximum federal estate tax will rise to 40 percent, but will continue to apply an inflation-adjusted exclusion of $5 million. The new law also makes permanent portability between spouses and some Bush-era technical enhancements to the estate tax.

 

Businesses

 

The business tax incentives in the new law, while not receiving as much press as the individual tax provisions, are valuable. Two very popular incentives, bonus depreciation and small business expensing, are extended as are many business tax “extenders.”

 

Bonus depreciation/small business expensing.  The new law renews 50 percent bonus depreciation through 2013 (2014 in the case of certain longer period production property and transportation property). Code Sec. 179 small business expensing is also extended through 2013 with a generous $500,000 expensing allowance and a $2 million investment limit.  Without the new law, the expensing allowance was scheduled to plummet to $25,000 with a $200,000 investment limit.

 

Small business stock.  To encourage investment in small businesses, the tax laws in recent years have allowed noncorporate taxpayers to exclude a percentage of the gain realized from the sale or exchange of small business stock held for more than five years.  The American Taxpayer Relief Act extends the 100 percent exclusion from the sale or exchange of small business stock through 2013.

 

Tax extenders.  A host of business tax incentives are extended through 2013.  These include:

Research tax credit

Work Opportunity Tax Credit

New Markets Tax Credit

Employer wage credit for military reservists

Tax incentives for empowerment zones

Indian employment credit

Railroad track maintenance credit

Subpart F exceptions for active financing income

Look through rules for related controlled foreign corporation payments

 

Energy

 

For individuals and businesses, the new law extends some energy tax incentives.  The Code Sec. 25C, which rewards homeowners who make energy efficient improvements, with a tax credit is extended through 2013.  Businesses benefit from the extension of the Code Sec. 45 production tax credit for wind energy, credits for biofuels, credits for energy-efficient appliances, and many more.

 

Looking ahead

 

The negotiations and passage of the new law are likely a dress rehearsal for comprehensive tax reform during President Obama’s second term.  Both the President and the GOP have called for making the Tax Code more simple and fair for individuals and businesses.  The many proposals for tax reform include consolidation of the current individual income tax brackets, repeal of the AMT, moving the U.S. from a worldwide to territorial system of taxation, and a reduction in the corporate tax rate. Congress and the Obama administration also must tackle sequestration, which the American Taxpayer Relief Act delayed for two months. All this and more is expected to keep federal tax policy in the news in 2013.

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