Authored by David Cash, CPA, MAcc. Dave has worked in the Logan and Salt Lake City offices of CMP. He spent 2 years in the Logan office and has been in the Salt Lake City office for over 5 years. Dave specializes in oil and gas taxation, pension administration and reporting, and individual and business tax planning and compliance.
The long awaited and eagerly anticipated passage of tax legislation with the apt title, “The American Taxpayer Relief Act of 2012 (ATRA)” has extended a number of tax cuts originally passed during the 1st term of President George W. Bush’s administration and during the 1st term of President Obama’s administration.
There are many parts of this legislation that is almost certainly going to affect most, if not all, taxpaying Americans. Most of this legislation had to do with the “fiscal cliff” and didn’t come into effect until the 2013 tax year. There are some parts of this Act that will affect the 2012 tax year and this post will mention some of the tax law changes that will affect the 2012 tax year and/or the 2013 tax year filings.
2013 Tax Rates
The part of this Act that probably received the most press coverage will take effect for the 2013 tax year that was the extension of the marginal tax rates of 10, 15, 25, 33, and 35% for those with taxable income below $400,000 (if you are married filing jointly then the taxable income amount goes to $450,000 before you are in the 39.6% tax bracket, that is a very heft marriage penalty for those with that level of taxable income).
This law also permanently extends the 15% tax rates on long-term capital gains and qualified dividends for taxpayers in the 25, 33, and 35% tax brackets. Those taxpayers in the 10 and 15% tax brackets will continue to enjoy a zero percent rate on their long-term capital gains and qualified dividends. Those in the new 39.6% tax bracket will have their long-term capital gains and qualified dividends taxed at a top rate of 20%; which although is not as nice as 15% it is still a tax savings (even after the 3.8% Medicare Tax on Investment and Unearned Income gets added to the mix).
Child Tax Credit
One of my personal favorite extensions is for the Child Tax Credit of $1,000 per child with partial refund ability being permanently extended.
Phase outs are back. What do you mean back. Well I will tell you. Prior to the Bush tax cuts there where two phase-outs of deductions. One phase-out was for your personal exemptions and the other was a phase-out of itemized deductions. If your income is over $250,000 single or $300,000 married you will lose some of the benefit of these deductions. An example of how this phase out works it as follows; If you income was $350,000 and you were a married couple then your phase out would be computed as follows $350,000-$300,000=$50,000 X .03=$1,500. The phase out would be $1,500. This means that your itemized deductions would be reduced by the $1,500. If your total itemized deductions were $45,000 then you would only be able to deduct $45,000-$1,500=$43,500. The most common question I will be asked will be should I make charitable contribution or not because they are phased out. This is simply not the case. The total itemized deductions will we be reduced by the phase out amount so any additional deductions will continue to save taxes. Phase-outs can act as a hidden tax increase because they don’t exclude deductions, they only limit how much can be deducted.
Secondary Education has also seen the extension of various items. The permanent extensions included an increase in the annual contribution limit to the Coverdell Education Savings Accounts, and an increase in the phase out for the student loan interest deduction. The American Opportunity Tax Credit has also been extended through the 2017 tax year.
Premiums for mortgage insurance continue to be deductible as qualified residence interest and the deduction for state and local sales taxes can be taken as an itemized deduction, if elected, instead of taking the deduction for state income taxes. Both of these provisions have been extended through the 2013 tax year.
One thing to keep in mind is that some banks may not report the mortgage insurance on Form-1098 due to the late passage of this law. You may need to contact your mortgage company to have them send you the amount you paid for 2012.
A provision that has been extended that should help with planning is that through the 2013 tax year, those age 70 ½ or older can receive tax-free distributions from their IRAs to certain public charities. The IRA must make this distribution directly to the charity. Since this provides a tax-free distribution you can’t also claim a charitable contribution deduction. For those taxpayers that are 70 ½ or over an use the standard deduction this can provide an extra tax benefit that otherwise would not have been recognized. For those that have income at a level that would generate the extra Medicare tax this may also boost the benefit of this planning item. This provision is usually extended in December of the extension year; which provides for limited opportunities for planning.
An item that has been permanently extended is the Alternative Minimum Tax (AMT). This increases the AMT exemption amount to $78,750 for Married Filing Joint filers in 2012 and is indexed for inflation moving forward. This is a permanent change and is an item that would normally get an inflation adjustment each December, but it is nice to have the inflation adjustment in the law so that we have one less unknown item for tax planning. At least until the law is changed, again.
The Section 179 deduction has been increased up to $500,000 with a $2 million phase-out for the 2012 and 2013 tax years. After 2013 the Section 179 deduction will drop to $25,000. Before passage of this law the Section 179 deduction was only $139,000. Bonus depreciation was extended for 2014 and 2015 for certain long-term assets and transportation. This means that if you purchase “original use” assets (meaning brand new) you can write off 50% of the cost in the year of purchase. Qualified Leasehold improvements made by retail and restaurants will qualify for Section 179 for improvements made before 2014.
Surprise! We have a permanent fix to the Estate Tax Exclusion. The Estate exclusion will be set at the $5,120,000 per person and will be indexed for inflation. The rate was increased from 35% to 40% but with proper planning and a gifting program most estates will fall below this new exemption. It’s about time we have a law we can count on (with the caveat that tax laws can be changed in the future). The new law also makes permanent the “Portability” feature which allows spouses to pass along any unused portion of their Estate Exclusion to their surviving spouse.
Research & Development Tax Credit
The R&D credit was extended again for 2012 and 2013. I wish they would just make this permanent. This credit seems to be extended every year, but it makes planning for it difficult when the extension that included the 2012 tax year was signed into law in 2013.
Quite a few of the items mentioned here are things that I hoped would happen. It is nice to have a year or more to plan and have some items in the law. Some of the permanent provisions, like the AMT, and some of the 2012 and 2013 provisions, like the IRA distributions to charities, are items that have been extended for many years (usually in December of the effected tax year). Hopefully the United States Congress will see that it is easier to encourage action by using tax law, if the tax law is on the books early enough to make a decision, rather than after the year is already passed or almost over.
As with any tax items we recommend that you discuss these items with your tax professional to see which of these items may affect you and your specific tax situation.