SHATTUCK'S TAX FACTS

Federal income tax update

by Alan Shattuck, CRTP

SACRAMENTO

February 12, 2013 8:37pm


The American Tax Relief Act has an impact on your income taxes for 2012 and beyond. Depending on what you earn, how you earn it, and how much you earn will determine how much more you may owe in taxes in the future.

Payroll Taxes went up 2 percent, effective January 1, 2013, because the Payroll Tax Holiday in effect for 2011 and 2012 expired and was not extended. This expiration of the reduction of the Social Security contribution rate from 6.2 percent to 4.2 percent of Social Security Wages and the reduction of the Social Security Self-Employment tax from 12.4 percent to 10.4 percent was commonly referred to as the “Payroll Tax Holiday.”

The following Forms have been authorized for filing:

➢ Form 4562 – Depreciation and Amortization starting Sunday, February 10, 2013, and

➢ Form 8863 – Education Credits starting Thursday, February 14, 2013 – Valentine’s Day

As you are aware, the last minute passage of this legislation forced the Internal Revenue Service to delay the first filing date to January 30, 2013 for most returns. There are still further delays into the first week in March (A specific date will be announced in the near future.) for other returns dealing with the following forms:

➢ Form 3800 – General Business Credit

➢ Form 5695 – Residential Energy Credits

➢ Form 5884 – Work opportunity Credit

➢ Form 8396 – Mortgage Interest Credit

➢ Form 8582 – Passive Activity Loss Limitations

➢ Form 8839 – Qualified Adoption Expenses

➢ And 23 other Forms – Check www.irs.gov for the current list.

The following provisions are extended retroactively to 1/1/2012 through 12/31/2013:

➢ The State and Local Sales Tax Deduction in lieu of State Income Tax Deduction on Schedule A

➢ Mortgage Insurance Premiums are treated as residence interest on Schedule A

➢ Above-the-Line deduction for Qualified Tuition and Related Expenses, in lieu of a tax credit, on Form 1040 Page 1

➢ Above-the-Line Teachers Classroom Expense Deduction up to $250. On the Form 1040, Page 1

➢ The excludable employer-provided Mass Transit Benefit is revived to $240 per month and continues through 2013

➢ Energy-Efficient Improvements to existing homes credit under Code Sec. 25C is retroactively extended for two years through 2013. A taxpayer can claim a 10 percent credit on the cost of: (a) qualified energy efficiency improvements, and (b) residential energy property expenditures, with a lifetime credit limit of $500 ($200 for windows and skylights)

➢ Tax-Free distributions (up to $100,000) made by taxpayers over age 70.5 from individual retirement plans for charitable purposes, which expired at the end of 2011, is now revived for 2012 and continued through 2013. Special rules may apply.

The following provisions were scheduled to expire after 2012 but have been extended through 2013:

➢ A Principal Residence Acquisition Debt Relief Exclusion was established by the Mortgage Debt Relief Act of 2007 and provided a Cancellation of Debt (COD) exclusion of $2 million ($1 million if filing Married Filing Separately) limited to acquisition debt. This exclusion is available even if the taxpayer is solvent. This Act extends this exclusion for one year so that it applies to home mortgage debt discharged before 2014

➢ The Fifty Percent Bonus Depreciation is extended through 2013

➢ The IRC 179 Deduction Election limitation is $500,000 for 2012 and 2013

The following personal tax credits will be extended through 2017:

➢ The $1,000 Child Tax Credit

➢ The enhanced Earned Income Tax Credit

➢ The enhanced American Opportunity Tax Credit

The following provisions have been made permanent instead of expiring after 2012 as previously scheduled:

➢ Standard Deduction amounts

➢ AMT relief for the AMT Exemption amount is reinstated retroactive to January 1, 2012 and adjusts for inflation thereafter

➢ Child & Dependent Care Credit rules based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one

➢ The exclusion for employer-provided educational assistance

➢ The enhanced rules for student loan interest deductions

➢ The employer-provided child care credit

The following represent changes designed to generate more tax revenue from the wealthy:

➢ The itemized deduction phase-out is reinstated, and personal exemption phase-out will be reinstated, but with different AGI starting Thresholds (adjusted for inflation): $300,000 for married filing joint, $275,000 for head of household, and $250,000 for single

➢ Capital gains tax and dividends tax will be 20 percent for taxpayers with income over $400,000 (single) and $450,000 (joint filers). This does not include the new 3.8 percent health care tax on investment income above $200,000 (single) and $250,000 (joint filers) in adjusted gross income, so the top rate for capital gains and dividends will be 23.8 percent. For lower income levels, the tax rates will be 0 percent, 15 percent or 18.8 percent.

➢ Continues with the standard deduction for joint filers at 2 times single filers ( would have otherwise reverted to 1.67 times single filers)

➢ Retained the 10, 15, 25, and 28 Percent income tax brackets from the Bush tax cuts permanently

➢ Retains the 33 and 35 Percent income tax brackets from the Bush tax cuts for taxable income under $400,000

➢ A top rate of 39.6 percent (up from 35 percent) will be imposed on individuals making more than $400,000 a year, $425,000 for head of household, and $450,000 for married filing joint

➢ The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5 percent of AGI to 10 percent of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013-2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5 percent of AGI

➢ For Cafeteria plan years beginning after December 31, 2012, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement for any plan year is $2,500

As more information is available, I will be issuing additional updates.

The above is a brief overview of the changes in tax regulations that were put in place with the most recent legislation. If you have further questions, please contact your professional tax preparer as to how this effects your tax situation, or contact me at alan.shattuck@sbcglobal.com.