The American Taxpayer Relief Act of 2012 represents a mixed bag for small businesses and individuals
Are you as sick of the words fiscal cliff as I am? Better yet, do you really believe that the new law has saved us from it? After reading the highlights over and over the past couple of days, I am less convinced than ever. I found the special interest pork included interesting, but I was certainly not surprised. Bless NASCAR, the farmers and Hollywood for their strong lobbies.
Individuals and businesses made some gains and took some hits from The American Taxpayer Relief Act of 2012.
Ordinary income ratesFor those earning LESS THAN $400,000 if single, $450,000 if married filing jointly, or for heads-of-household earning less than $425,000, the tax rates remain the same. The 10, 15, 25, 28, 33 and 35 percent rates are unchanged for 2013. If you exceed those thresholds, the top rate is boosted to 39.6 percent. That is some good news for most people. However, the payroll tax holiday on the Social Security portion of FICA tax paid by employees has been adjusted back up to 6.2 percent, a 2 percent increase on your wages or self-employment income up to the wage base of $113,700. I think its obvious who that will affect.
Itemized deductions and personal exemptionsWhen you hit certain dollar thresholds, your exemptions and certain itemized deductions will be reduced beginning in 2013. For married couples filing jointly that threshold is $300,000, $250,000 for single taxpayers, $275,000 for heads-of-household and $150,000 for married filing separately. The exemptions will be reduced by 2 percent for each $2,500 (or portion thereof) by which the taxpayers adjusted gross income exceeds the threshold amount. The itemized deductions will be reduced by 3 percent of the excess threshold amount, with the reduction limited to 80 percent. Also note that the reduction of deductions does NOT apply to medical expenses, investment interest expense, wagering, casualty or theft losses.
Alternative minimum tax reliefThis was a big one! As I did end-of-year tax planning, I found more and more middle-income people subject to this onerous tax. Not only did Congress finally add a permanent patch to it, but they made it retroactive to Jan. 1, 2012! This will literally save many taxpayers, estimated to number about 30 million, thousands of dollars this year. The exemption amounts will now be indexed each year going forward.
Capital gains and dividendsUnder the new law, long-term capital gains tax on those in the 39.6 percent tax rate bracket will increase to 20 percent from 15 percent. In addition, a 3.8 percent Medicare surtax created under the 2010 Healthcare Act kicks in on net investment income for married individuals filing a joint return whose adjusted gross income (AGI) exceeds $250,000 and single taxpayers whose AGI is greater than $200,000. Net investment income can be from interest, dividends, annuities, royalties, rents or disposition of property. This surtax can sneak up on you so be sure to discuss it with your tax professional.
If your ordinary income tax rate is below 25 percent, you will continue to pay 15 percent capital gains tax and will not be subject to the additional 3.8 percent surtax. However, if you are in the 25 percent or greater tax bracket, but LESS than the $400,000/$450,000 threshold, you will continue to enjoy the 15 percent rate but will also be subject to the 3.8 percent surtax, giving you an effective rate of 18.8 percent.
Extensions of certain other provisionsSeveral extensions were included in the new law such as tax credits for qualified tuition and other expenses of higher education, the child tax credit and unearned income credit (through 2017). Also included were deductions for expenses of elementary and secondary school teachers, continuation of the sales tax deduction election and several others. Another very important extension was the exclusion from income mortgage debt forgiveness on a maximum $2 million of debt through 2013. Please be sure to ask your tax professional about the extenders that will apply to you.
DepreciationThe 50 percent bonus depreciation has been renewed through 2013! This is an important break for businesses considering the purchase of new assets and certain leasehold improvements. The Code Sec. 179 small business expensing has also been extended through 2013. That allowance is $500,000 with a $2 million investment limit. This is a very generous allowance and is RETROACTIVE to 2012.
Tax credit extensionsSeveral tax credits were extended to 2013, and many were retroactive to 2012, including:
Energy tax incentives
Research and Experimentation Credit
New Markets Tax Credit
Work Opportunity Tax Credit and several others
Qualified small business stockThe new law extended the 100 percent exclusion on gain from the sale of small business stock that was purchased before Jan. 1, 2014, and held for more than five years.
Several other provisions have been extended or changed relating to individuals, businesses, estate and gift taxes, etc. Many of those items that were retroactive to Jan. 1, 2012, will have a major effect when you do your taxes this spring, and several will allow you to do educated tax planning for 2013.
So What Happens Next?
We still have a major deficit to address before Moodys downgrades our credit rating again, as they are threatening to do. Congress needs to finish the job and start getting our financial affairs in order before the value of the dollar plummets, creating chaos. The issue of sequestration must be addressed within the next two months. The entire Tax Code needs to be revamped and made simpler and fairer for both individuals and businesses. These cliffs need to be avoided in the future. The American people, and the businesses they operate, deserve better.
Other articles by Sandy Napoleon Hudson:
New IRS Rules On Hurricane Victims & Retirement
Sandra Napoleon-Hudson is the managing member of Sandra Napoleon-Hudson CPA LLC, based in Atlanta. Her expertise includes multi-state taxation for corporations, partnerships and individuals, business consulting, sports and entertainment taxation and IRS representation. As a former partner of a New York firm, she appeared frequently on television and in print media.