Although Congress averted many
of the consequences of a possible tumble over the fiscal cliff with last-minute
action, we would like you to be aware of the impact of the bill that was passed
known as the American Taxpayer
Relief Act of 2012 - signed into
law Jan. 2.
We have compiled an overview of
the key provisions of this new law. We encourage you to review them and call us
if you have any concerns about how your tax situation will change as we prepare
your returns for this filing season.
A Tax Increase on the Highest Incomes in 2013. Although most taxpayers avoided a tax increase,
rates did rise for top earners. Taxpayers (including those who receive income
through partnerships and S corporations) who earn more than $400,000 ($450,000
for married taxpayers filing jointly) have a marginal tax rate of 39.6%. All
other existing rates remain the same.
Higher Capital Gains Rates for Top Earners. The same individuals who are subject to the
new 39.6% top rate on income now face a 20% rate on capital gains and
dividends, up from 15%. Taxpayers in the 10% and 15% income brackets have a
zero capital gains rate and those in the middle will continue to pay 15%.
Higher Personal Exemptions Phase-out Levels. The phase-out levels for personal exemptions
and itemized deduction have been raised to $300,000 for married couples and
surviving spouses and $250,000 for individuals.
Permanent AMT Inflation Indexing. The alternative minimum tax originally was intended to prevent
high-income individuals from avoiding taxes. In the absence of a patch for last
year, more than 60 million middle-income taxpayers might have been subject to
the AMT on their 2012 income. After years of last-minute AMT "patches," the new
law permanently indexes the AMT to inflation starting in tax year 2012. For
income you earned in 2012, the exemptions are $50,600 for individuals and
$78,750 for married taxpayers filing jointly.
Restoration of the Full Rate for Social Security and Medicare Taxes. The law did not extend the 2% cut for
the employees' portion of the Social Security payroll tax, which means it will go
back to the full rate of 6.2% on income up to $113,700 in 2013.
Clarity on Estate and Gift
years of uncertainty in this area, the new law holds the estate and gift-tax
exclusion at $5 million, indexed for inflation ($5.12 million in 2012). The top
tax rate jumped to 40% from 35% as of Jan. 1, 2013, but without this change, it
would have soared to 55% with a $1 million exclusion amount. The act made
permanent the estate tax portability election, which allows a surviving spouse
to use a deceased spouse's unused exemption amount.
Marriage Penalty Relief Retained. Certain taxpayers filing
jointly will no longer have to worry about paying more than if they filed as
single taxpayers; joint filers also will enjoy a larger standard deduction.
Education Tax Benefits Extended. Many deductions for education expenses were set to expire at the end
of last year, but they will remain in place under the new law. For example, the
law extends the deduction for qualified education expenses through 2013 and
retroactively for the 2012 tax year.
Conversions to Roth Retirement Plans. The new law allows participants in an
employer-sponsored 401(k) to transfer any amount to a Roth 401(k) - the funds will be taxed upon
Tax Relief for Mortgage Loan Modifications. Taxpayers struggling to pay their mortgages,
or whose home values have fallen below their purchase price, were given another
year of tax relief on any qualifying "indebtedness income" they may receive as
a result of a loan modification or short sale on their principal residence.
Also, taxpayers who have net
investment income beginning in 2013 will face a 3.8% surtax on categories of
certain unearned income, potentially increasing the total tax rate to 43.4%. This
tax was already slated to go into effect as a result of health care reform.
We can help you understand the
effect that these changes will have on your tax situation. In addition to
preparing your return in a way that maximizes your tax advantages, we are also
available after tax season to advise on strategies and planning decisions that
will help you minimize taxes and meet your financial goals.
Please don't hesitate to contact us today at 281-870-9991 to schedule an appointment to
begin discussing your options.