In Volume 1 of our 2013 newsletter, we highlight:
- Overview Of The 2012 American Taxpayer Relief Act
- 2012 Tax Act – Individual Extenders
- 2013 Changes In Tax
- Federal Deposit Insurance Corporation (FDIC) Insurance
- Borrowing Money — Know The Risks
- Business Provisions of Tax Act
Overview Of The 2012 American Taxpayer Relief Act
- For tax years beginning after 2012, the 10%, 15%, 25%, 28%, 33%, and 35% tax brackets from the Bush-Era 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, which will begin at the following thresholds: $400,000 (single), $425,000 (head of household), $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.
- The new law prevents steep increases in estate, gift, and generation-skipping transfer 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 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.
- 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.
- Beginning in 2013, personal exemptions and itemized deductions will be phased out(reduced) for adjusted gross income over $250,000 (single), $275,000 (head ofhousehold), and $300,000 (joint filers).
- The new law provides permanent AMT relief. 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.
- The 2% payroll tax cut was allowed to expire at the end of 2012. These are the major changes that are getting much of the attention. These changes are permanent which is one of the problems with many of the prior tax laws; they kept moving the issue down the road a little further. See the following articles concerning other provisions that are part of the new law.
2012 Tax Act – Individual Extenders
The recently enacted 2012 American Taxpayer Relief Act extends a host of important tax breaks for individuals. We are providing you an overview of these key tax breaks that were extended by the new law.
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 is now revived for 2012 and continued through 2013.
- The exclusion for discharge of qualified principal residence indebtedness, which applied for discharges before January 1, 2013 is now continued to apply for discharges before January 1, 2014.
- The treatment of mortgage insurance premiums as qualified residence interest, which expired at the end of 2011 in 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 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 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 is now revived for 2012 and continued through 2013.
- Tax-free distributions from individual retirement plans for charitable purposes for individuals age 70½ or older, which expired at the end of 2011 is now revived for 2012 and continued through 2013.
Because 2012 has already passed, a special rule permits distributions taken in 2012 to be transferred to charities before February 1, 2013. Another special rule permits certain distributions made in January 2013 as being deemed made on December 31, 2012.
- The American Opportunity Tax Credit for college costs which was to expire at the end of 2012 has been extended through 2017.
- The nonbusiness energy property credit for existing homes is extended two years through 2013. A taxpayer can claim a 10% credit with a lifetime credit limit of $500 ($200 for windows and skylights).
- These are some of the many provisions affecting individuals. Unfortunately, these were not made permanent and will, of course, have to be debated again at a later date.
If you have any questions concerning any of these provisions or any other items not listed, please give us a call.
Federal Deposit Insurance Corporation (FDIC) Insurance
The unlimited insurance coverage for noninterest-bearing accounts under FDIC expired effective December 31, 2012. Prior to 2013 noninterest-bearing accounts were insured separately from other accounts at the same FDIC insured depository institutions. Beginning January 1, 2013 these accounts will be added with any other accounts at the same institution in the same applicable ownership category. The maximum FDIC coverage per depositor will be $250,000 at each insured institution.
If you have several accounts which are held with the same ownership name at one qualified institution, you need to check if you are fully insured. If the total combined balance in these accounts exceeds $250,000, you will need to take corrective action to see that you are covered. The FDIC insurance coverage has been permanently increased to $250,000.
Borrowing Money — Know The Risks
Many people do not hesitate to borrow money when it’s time to make a major purchase, take a vacation, or improve their homes. Loans are often easy to obtain, and low interest rates can add to the allure. Be careful. Before you borrow money, be sure you are comfortable with your ability to repay and you fully understand the risks.
If you participate in a retirement plan at work, you may be able to borrow money from your account. The interest rate may be reasonable, and you may be able to repay the loan conveniently through payroll deduction. These are all positives. But also consider the negatives. If you borrow from your account, you will have to repay the loan (both principal and interest) with after-tax money. In a 25% tax bracket, for example, you would need $13,333 of taxable income to repay $10,000. Most plans require participants who leave their employers to repay the loan in full upon termination. Amounts you do not pay back would be considered taxable income that year and possibly subject to the 10% early withdrawal penalty.
When you meet all tax law requirements, you can deduct home mortgage and home equity interest (within limits) if you itemize your deductions. So far, so good. But also consider the risks. This type of debt is secured by your home. You should not take on more debt than you can comfortably handle. Then consider the possibility that you may want to, or have to, sell your home some day. You would have to pay off the balance of your loans at that time. In a declining real estate market, it’s possible your sales proceeds might be less than your loan balances. Before agreeing to a variable rate loan, consider the potential effect of rising interest rates on your payments.
What could be easier than pulling out the plastic when you want to buy something? But, once again, know the risks. Overspending is never a good idea, especially when it means carrying a balance on your credit card for long periods. Even if the rate is highly competitive, consumer interest can really add up.
Always be very careful when borrowing money. What looks good today may not be later on.
Business Provisions Of Tax Act
The recently enacted 2012 American Taxpayer Relief Act extends several important tax breaks for businesses. The following depreciation provisions are retroactively extended:
- Fifteen year straight line depreciation for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements continues through 2013.
- Expensing of business assets under Code Section 179 has been extended. The expensing limit for 2012 and 2013 is $500,000 with a $2 million investment limit.
- Bonus depreciation which allows a 50% deduction for qualified new business assets is also extended through 2013.
The following business credits are also extended:
- The research credit is modified and retroactively extended for two years through 2013.
- The employer wage credit for employees who are active duty members of the uniformed services is retroactively extended for two years through 2013.
- The work opportunity tax credit is retroactively extended for two years through 2013.
These are some of the major business provisions. There are a number of other issues which are very limited in the businesses that they will affect.
For more information, please contact us.