The recently
enacted 2012 American Taxpayer Relief Act is a sweeping tax package that
includes, among many other items, permanent extension of the Bush-era tax cuts
for most taxpayers, revised tax rates on ordinary and capital gain income for
high-income individuals, modification of the estate tax, permanent relief from
the AMT for individual taxpayers, limits on the deductions and exemptions of
high-income individuals, and a host of retroactively resuscitated and extended
tax breaks for individual and businesses. Here's a look at the key elements of
the package:
- Tax
rates. For
tax years beginning after 2012, the 10%, 15%, 25%, 28%, 33% and 35% tax
brackets reflecting the Bush tax cuts will remain in place and are made
permanent. This means that, for most Americans, the tax rates will stay
the same. However, there will be a new 39.6% rate, that will apply for
income over: $400,000 (single), $425,000 (head of households), $450,000
(joint filers and qualifying widow(er)s), and $225,000 (married filing
separately). These dollar amounts will be inflation-adjusted for tax years
after 2013.
- Estate
tax. The
new law prevents steep increases in estate, gift and generation-skipping
transfer (GST) tax that were slated to occur for individuals dying and
gifts made after 2012 by permanently keeping the exemption level at
$5,000,000 (as indexed for inflation). However, the new law also
permanently increases the top estate, gift, and GST rate from 35% to 40%
It also continues the portability feature that allows the estate of the
first spouse to die to transfer his or her unused exclusion to the
surviving spouse. All changes are effective for individuals dying and
gifts made after 2012.
- Capital
gains and qualified dividends rates. The
new law retains the 0% tax rate on long-term capital gains and qualified
dividends, modifies the 15% rate, and establishes a new 20% rate.
Beginning in 2013, the rate will be 0% if income falls below the 25% tax
bracket; 15% if income falls at or above the 25% tax bracket but below the
new 39.6% rate; and 20% if income falls in the 39.6% tax bracket. It
should be noted that the 20% top rate does not include the new 3.8% surtax
on investment-type income and gains for tax years beginning after 2012,
which applies on investment income above $200,000 (single) and $250,000
(joint filers) in adjusted gross income. So actually, the top rate for
capital gains and dividends beginning in 2013 will be 23.8% if income
falls in the 39.6% tax bracket. For lower income levels, the tax will be
0%, 15%, or 18.8%.
- Personal
exemption phaseout. Beginning
in 2013, personal exemptions will be phased out (i.e., reduced) for
adjusted gross income over $250,000 (single), $275,000 (head of household)
and $300,000 (joint filers). Taxpayers claim exemptions for themselves,
their spouses and their dependents. Last year, each exemption was worth
$3,800.
- Itemized
deduction limitation. Beginning
in 2013, itemized deductions will be limited for adjusted gross income
over $250,000 (single), $275,000 (head of household) and $300,000 (joint
filers).
- AMT
relief. The
new law provides permanent alternative minimum tax (AMT) relief. Prior to
the Act, the individual AMT exemption amounts for 2012 were to have been
$33,750 for unmarried taxpayers, $45,000 for joint filers, and $22,500 for
married persons filing separately. Retroactively effective for tax years
beginning after 2011, the new law permanently increases these exemption
amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and
$39,375 for married persons filing separately. In addition, for tax years
beginning after 2012, it indexes these exemption amounts for inflation.
- Tax
credits for low to middle wage earners. The
new law extends for five years the following items that were originally
enacted as part of the 2009 stimulus package and were slated to expire at
the end of 2012: (1) the American Opportunity tax credit, which provides
up to $2,500 in refundable tax credits for undergraduate college
education; (2) eased rules for qualifying for the refundable child credit;
and (3) various earned income tax credit (EITC) changes.
- Cost
recovery. The
new law extends increased expensing limitations and treatment of certain
real property as Code Section 179 property. It also extends the bonus
depreciation provisions with respect to property placed in service after
Dec. 31, 2012.
- Tax
break extenders. Many
of the “traditional” tax extenders are extended for two years,
retroactively to 2012 and through the end of 2013. Among many others, the
extended provisions include the election to take an itemized deduction for
state and local general sales taxes in lieu of the itemized deduction for
state and local income taxes, the $250 above-the-line deduction for
certain expenses of elementary and secondary school teachers, and the
research credit.
- Pension
provision. For
transfers after Dec. 31, 2012, in tax years ending after that date, plan
provision in an applicable retirement plan (which includes a qualified
Roth contribution program) can allow participants to elect to transfer
amounts to designated Roth accounts with the transfer being treated as a
taxable qualified rollover contribution.
- Payroll
tax cut is no more. The 2%
payroll tax cut was allowed to expire at the end of 2012.
Limits
on deductions and exemptions in the 2012 American Taxpayer Relief Act
Among the tax increases in the recently enacted 2012 American Taxpayer Relief Act are provisions that impose, or in some cases reinstate, caps on tax breaks for top earners. The new rules reinstate the personal exemption phase-out (PEP) and so-called Pease limit on itemized deductions — named after its author, former Ohio Democratic representative Don Pease. Both were created in 1990 in an effort to generate more government revenue without raising the marginal tax rates but were phased out by 2010. Now they are back. Here's how they work:
Among the tax increases in the recently enacted 2012 American Taxpayer Relief Act are provisions that impose, or in some cases reinstate, caps on tax breaks for top earners. The new rules reinstate the personal exemption phase-out (PEP) and so-called Pease limit on itemized deductions — named after its author, former Ohio Democratic representative Don Pease. Both were created in 1990 in an effort to generate more government revenue without raising the marginal tax rates but were phased out by 2010. Now they are back. Here's how they work:
PEP limitations to apply to “high earners.”
Taxpayers claim exemptions for themselves, their spouses and
their dependents. Last year, each exemption was worth $3,800. Under the new
law, for tax years beginning after 2012, the Personal Exemption Phaseout (PEP),
which had previously been suspended, is reinstated with a starting threshold
for those making $300,000 for joint filers and a surviving spouse; $275,000 for
heads of household; $250,000 for single filers; and $150,000 (one-half of the
otherwise applicable amounts for joint filers) for married taxpayers filing
separately. Under the phaseout, the total amount of exemptions that can be
claimed by a taxpayer subject to the limitation is reduced by 2% for each
$2,500 (or portion thereof) by which the taxpayer's AGI exceeds the applicable
threshold. These dollar amounts are inflation-adjusted for tax years after
2013.
Pease limitations to apply to “high earners.”
For tax years beginning after 2012, the “Pease” limitation on
itemized deductions, such as the ones taken for mortgage interest, charitable
giving and state and local taxes paid, and which had previously been suspended,
is reinstated with a starting threshold for those making $300,000 for joint
filers and a surviving spouse; $275,000 for heads of household; $250,000 for
single filers; and $150,000 (one-half of the otherwise applicable amounts for
joint filers) for married taxpayers filing separately. Thus, for taxpayers
subject to the “Pease” limitation, the total amount of their itemized
deductions is reduced by 3% of the amount by which the taxpayer's adjusted
gross income (AGI) exceeds the threshold amount, with the reduction not to
exceed 80% of the otherwise allowable itemized deductions. These dollar amounts
are inflation-adjusted for tax years after 2013.
Brief overview of the AMT.
The AMT is a parallel tax system which does not permit
several of the deductions permissible under the regular tax system, such as
property taxes. Taxpayers who may be subject to the AMT must calculate their
tax liability under the regular federal tax system and under the AMT system
taking into account certain “preferences” and “adjustments.” If their liability
is found to be greater under the AMT system, that's what they owe the federal
government.
Originally enacted to make sure that wealthy Americans did
not escape paying taxes, the AMT has started to apply to more middle-income
taxpayers, due in part to the fact that the AMT parameters were not indexed for
inflation. In recent years, Congress provided a measure of relief from the AMT
by raising the AMT “exemption amounts”—allowances that reduced the amount of
alternative minimum taxable income (AMTI), reducing or eliminating AMT
liability. (However, these exemption amounts are phased out for taxpayers whose
AMTI exceeds specified amounts.)
For 2011, the AMT exemption amounts were $74,450 for married
couples filing jointly and surviving spouses; $48,450 for single taxpayers; and
$37,225 for married filing separately. However, for 2012, those amounts were
scheduled to fall back to the amounts that applied in 2000: $45,000, $33,750,
and $22,500, respectively. This would have brought millions of additional
middle-income Americans under the AMT system, resulting in higher federal tax
bills for many of them, along with higher compliance costs associated with
filling out and filing the complicated AMT tax form.
New law provides permanent fix. To
prevent the unintended result of having millions of middle-income taxpayers
fall prey to the AMT, Congress has once again applied a “patch” to the problem
by extending the 2011 exemption amounts, increased slightly, but this time the
patch is intended as a permanent fix. Under the new law, for tax years
beginning in 2012, the AMT exemption amounts are increased to: (1) $78,750 in
the case of married individuals filing a joint return and surviving spouses;
(2) $50,600 in the case of unmarried individuals other than surviving spouses;
and (3) $39,375 in the case of married individuals filing a separate return.
Most importantly, these amounts will be indexed for inflation after 2012, meaning
that the annual “patches” will no longer be needed.
Personal credits may be used to offset AMT. Another
provision in the new law provides AMT relief for taxpayers claiming personal
tax credits. The tax liability limitation rules used to provide that certain
nonrefundable personal credits (including the dependent care credit and the
elderly and disabled credit) were allowed only to the extent that a taxpayer
had regular income tax liability in excess of the tentative minimum tax, which
had the effect of disallowing these credits against the AMT. Temporary
provisions had been enacted which permitted these credits to offset the entire
regular and AMT liability through the end of 2011. The new law extends this
provision permanently, so that the credits are allowed to offset both regular
and AMT tax liability.
Enacted 2012 American Taxpayer Relief Act extends a host of
important tax breaks for individuals
The new law extends the following items for the period
indicated beyond their prior termination date as shown in the listing:
... the deduction for certain
expenses of elementary and secondary school teachers, which expired at the end
of 2011 and which is now revived for 2012 and continued through 2013;
... the exclusion for discharge
of qualified principal residence indebtedness, which applied for discharges
before Jan. 1, 2013 and which is now continued to apply for discharges before
Jan. 1, 2014;
... parity of the monthly dollar
limitation for the exclusions for employer-provided mass transit and vanpooling,
with the exclusion for parking benefits, which had applied before 2012 and
which is now revived for 2012 and continued through 2013;
... the treatment of mortgage
insurance premiums as qualified residence interest, which expired at the end of
2011 and which is now revived for 2012 and continued through 2013;
... the option to deduct state
and local general sales taxes, which expired at the end of 2011 and which is
now revived for 2012 and continued through 2013;
... the special rule for
contributions of capital gain real property made for conservation purposes,
which expired at the end of 2011 and which is now revived for 2012 and
continued through 2013;
... the above-the-line deduction
for qualified tuition and related expenses, which expired at the end of 2011
and which is now revived for 2012 and continued through 2013; and
... tax-free distributions from
individual retirement plans for charitable purposes, which expired at the end
of 2011 and which is now revived for 2012 and continued through 2013. Because
2012 has already passed, a special rule permits distributions taken in Dec.
2012 to be transferred to charities for a limited period in 2013. Another
special rule permits certain distributions made in Jan. 2013 as being deemed
made on Dec. 31, 2012.
American
Opportunity tax credit for college costs.
Added to the
tax code in 2009 as a temporary replacement of the previous Hope tax credit,
the American Opportunity tax credit both increased the tax relief available for
students from middle-income families and also extended relief for the first
time to students from lower-income families. Now that the American Opportunity
tax credit has been extended for five years, it might be a good time to review
the tax benefits available under that credit, with an eye to how it compares
with the Hope credit, which would have been in effect over the next two years
had the American Opportunity tax credit not been extended.
- Families
with a family member in college can benefit from a tax credit for tuition
and fees. From a taxpayer's point of view, a credit is almost always
preferable to a deduction, because a credit reduces taxes owed, while a
deduction only reduces taxable income. The maximum amount of the American
Opportunity tax credit is $2,500 (up from a maximum credit of $1,800 under
the Hope credit). The credit is 100% of the first $2,000 of qualifying
expenses and 25% of the next $2,000, so the maximum credit of $2,500 is
reached when a student has qualifying expenses of $4,000 or more.
- While
the Hope credit was only available for the first two years of
undergraduate education, the American Opportunity tax credit is available
for up to four years.
- Under
the Hope credit, qualifying expenses were narrowly defined to include just
tuition and fees required for the student's enrollment. Textbooks were
excluded, despite their escalating cost in recent years. The American
Opportunity tax credit expands the list of qualifying expenses to include
textbooks.
- The
Hope credit was nonrefundable, i.e., it could reduce your regular tax bill
to zero but could not result in a refund. This meant that if a family
didn't owe any taxes it couldn't benefit from the credit, which prompted critics
to argue that the credit was thus denied to those families most in need of
help affording college. The American Opportunity tax credit addresses this
criticism by providing that 40% of the credit is refundable. This means
that someone who has at least $4,000 in qualified expenses and who would
thus qualify for the maximum credit of $2,500, but who has no tax
liability to offset that credit against, would qualify for a $1,000 (40%
of $2,500) refund from the government.
- The
Hope credit was not available to someone with higher than moderate income.
Under the credit's “phaseout” provision, taxpayers with adjusted gross
income (AGI) over $50,000 (for 2009) saw their credits reduced, and the
credit was completely eliminated for AGIs over $60,000 (twice those
amounts for joint filers). Under the American Opportunity tax credit,
taxpayers with somewhat higher incomes can qualify, as the phaseout of the
credit begins at AGI in excess of $80,000 ($160,000 for joint filers).
Expensing and
additional first-year depreciation in the 2012 American Taxpayer Relief Act
The recently enacted 2012 Taxpayer Relief Act includes a wide-ranging assortment of tax changes affecting both individuals and business. On the business side, two of the most significant changes provide incentives to invest in machinery and equipment by allowing for faster cost recovery of business property. Here are the details.
The recently enacted 2012 Taxpayer Relief Act includes a wide-ranging assortment of tax changes affecting both individuals and business. On the business side, two of the most significant changes provide incentives to invest in machinery and equipment by allowing for faster cost recovery of business property. Here are the details.
Enhanced small business expensing (Section 179 expensing).
Generally, the
cost of property placed in service in a trade or business can't be deducted in
the year it's placed in service if the property will be useful beyond the year.
Instead, the cost is “capitalized” and depreciation deductions are allowed for
most property (other than land), but are spread out over a period of years.
However, to help small businesses quickly recover the cost of capital outlays,
small business taxpayers can elect to write off these expenditures in the year
they are made instead of recovering them through depreciation. The expense
election is made available, on a tax year by tax year basis, under Section 179
of the Internal Revenue Code, and is often referred to as the “Section 179
election” or the “Code Section 179 election.” The new law makes three important
changes to the Code Section 179 expense election. First, the new law provides
that for tax years beginning in 2012 or 2013, a small business taxpayer will be
allowed to write off up to $500,000 of capital expenditures subject to a
phaseout (i.e., gradual reduction) once capital expenditures exceed $2,000,000.
For tax years beginning after 2013, the maximum expensing amount will drop to
$25,000 and the phaseout level will drop to $200,000. Second, the new law
extends the rule which treats off-the-shelf computer software as qualifying
property through 2013. Finally, the new law extends through 2013 the provision
permitting a taxpayer to amend or irrevocably revoke an election for a tax year
under Section 179 without IRS's consent.
Extension of
additional first-year depreciation.
Businesses are
allowed to deduct the cost of capital expenditures over time according to
depreciation schedules. In previous legislation, Congress allowed businesses to
more rapidly deduct capital expenditures of most new tangible personal
property, and certain other new property, by permitting an additional
first-year write-off of the cost. For qualified property acquired and placed in
service after Dec. 31, 2011 and before Jan. 1, 2013 (before Jan. 1, 2014 for
certain longer-lived and transportation property), the additional first-year
depreciation was 50% of the cost. The new law extends this additional
first-year depreciation for investments placed in service before Jan. 1, 2014
(before Jan. 1, 2015 for certain longer-lived and transportation property).The
new law also extends for one year the election to accelerate the AMT credit
instead of claiming additional first-year depreciation. The new law leaves in
place the existing rules as to what kinds of property qualify for additional
first-year depreciation. Generally, the property must be (1) depreciable
property with a recovery period of 20 years or less; (2) water utility
property; (3) computer software; or (4) qualified leasehold improvements. Also
the original use of the property must commence with the taxpayer – used machinery
doesn't qualify.
Various energy
credits extended include:
- The
nonbusiness energy property credit for certain energy-efficient property
installed in existing homes is retroactively extended for two years
through 2013. A taxpayer can claim a credit of: (1) 10% of the amount paid
for qualified energy efficiency improvements, and (2) the amount of
residential energy property expenditures, with a lifetime credit limit of
$500 ($200 for windows and skylights).
- The
alternative fuel vehicle refueling property credit (for non-hydrogen
qualified alternative fuel vehicle refueling property) is retroactively
extended for two years through 2013 so that taxpayers can claim a 30%
credit for qualified alternative fuel vehicle refueling property placed in
service through Dec. 31, 2013, subject to the $30,000 and $1,000
thresholds.
- The
credit for 2- or 3-wheeled plug-in electric vehicles is modified and
retroactively extended for two years through 2013.
- The
cellulosic biofuel producer credit is modified, retroactively restored,
and extended one year through 2013.
- The
income and excise credits for biodiesel and renewable diesel are
retroactively extended for two years through 2013.
- The
production credit for Indian coal facilities placed in service before 2009
is extended one year. The credit applied to coal produced by the taxpayer
at an Indian coal production facility during the 8-year period beginning
on Jan. 1, 2006, and sold by the taxpayer to an unrelated person during
such 8-year period and the tax year.
- The
credits with respect to facilities producing energy from certain renewable
resources is modified to include, as qualified facilities, certain
modifications, improvements, or additions to qualified facilities under
construction before Jan. 1, 2014. A facility using wind to produce
electricity will be a qualified facility if it is placed in service before
2014.
- The
credit for energy-efficient new homes is retroactively extended for two
years through 2013.
- The
credit for energy-efficient appliances is retroactively extended for two
years through 2013.
- The
additional depreciation deduction allowance for cellulosic biofuel plant
property is modified and extended one year.
- The
special rule for sale or disposition to implement federal energy
regulatory commission (FERC) or State electric restructuring policy for
qualified electric utilities is retroactively extended for two years
through 2013.
- The
excise tax credits for sale or use of alternative fuels and alternative
fuel mixtures are retroactively extended for two years through 2013.
I hope this
information is helpful. If you would like more details about these changes or
any other aspect of the new law, please do not hesitate to call.
Posted by Bob G. Dellinger, CPA
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