HoganWillig

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A New Tax Law – Again!

January 10th, 2013

The American Taxpayer Relief Act of 2012

Well, here we are a new year and another new tax law. The American Taxpayer Relief Act of 2012 came to be on January 2, 2013. The law addresses the expiring “Bush Era Tax Cuts” previously addressed on this blog and many, many, other places. Here is what the new tax law does for individuals- note that the fixes are made permanent unless otherwise noted. An important note, “permanent” means there is no set expiration; it does not mean the law cannot be changed again. Finally, not every aspect is addressed here.

First, all wage/salary earners are having 2% more withheld from their paychecks. The law allows the expiration of the 2 year Social Security Payroll Tax “holiday”. This holiday allowed a wage earner to keep an extra 2% in their pay but receive credit in their Social Security account for the tax – meaning it would not reduce benefits later.

Income Tax:

  • Personal income tax rates remain the same as 2012 rates for individuals with taxable income below $400,000 ($450, 000 married filing joint, $425,000 for Head of Household, $225,000 married filing separately). A “new” marginal rate is added for those above the $400,000 threshold.

The personal income tax rates are now –

  • 10%, 15%, 25%, 28%, 33%, 35% and 39.6%
    (pre- “Bush Era” rates – 15%, 28%, 31%, 36%, and 39.6%)

The positive for the over $400,000 level is the lower rates for the income below that level.

  • The brackets are now permanently adjusted for inflation
  • Long Term Capital Gains (assets held a year or more) have a new, higher, top rate. Taxpayers in the 39.6% rate bracket will have Long Term Capital Gains taxed at 20%; while the lower tax brackets will continue to have those gains taxed at 15%, or 0%

Currently:

Bracket 10% 15% 25% 28% 33% 35% 39.6%
Long term gain (held longer than 1 year) 0% 0% 15% 15% 15% 15% 20%
  • Dividends: Qualified Dividends continue to be taxed at the applicable long term capital gains rate for the individual.
  • Alternative Minimum Tax: Each year for some time the AMT has been “patched” to avoid a large slice of the American public being drawn in. The issue was that the AMT was never automatically adjusted for inflation, so as wages increased due to inflation, more taxpayers were ensnared in a low level AMT. With the 2012 Act, the base level of AMT exemption is increased and is then adjusted for inflation annually. This is particularly beneficial in states like New York where taxes are high. The deduction for such taxes is limited or lost if you exceed the AMT exemption amount.
  • Marriage Penalty: “Married filing joint” taxpayers will continue to have a standard deduction double that of “single” filers.
  • Limitations renewed: The 2012 Act did revive the so called “Pease Limitation” on itemized deductions and the phase-out on the personal exemption. For Married filing Joint above $300,000 ($150,000 single) these revived limitations kick in.
  • Child Tax Credit: The $1000 per child tax credit continued.
  • Earned Income Tax Credit: This credit continued through 2017.
  • Adoption Credit: made permanent at its higher level and now to be inflation adjusted.
  • Dependent Care Credit: Eligible expenses cap remains $3,000 ($6,000 for more than one qualifying individual); also maximum credit remains 35% of the qualifying expense.
  • Education incentives:
    • American Opportunity Tax Credit – extended to 2017 – per eligible student:
      • 100 % of first $2,000 in qualified tuition and related expenses
      • 25% next $2,000 (making max credit $2,500)
      • Applies to first 4 years of higher education
    • Qualified tuition and expenses deduction: to end of 2013
      • So called above the line since it reduces AGI
      • Cannot use in year taking American Opportunity credit or Lifetime Learning Credit
    • Energy Incentives – the 2012 Act extends the $500 lifetime credit for energy efficiency improvements to your home ($200 for windows/skylights) – expires at the end of 2013.
  • Estate/Gift Tax:Exemption/Credit Shelter remains $5 million per person and is adjusted for inflation annually (2013 $5.25 Million). The new law retains the unified credit as well. This means that you may pass the credits shelter amount during life or after death.

    Annual exclusion amount – no change here. Continues to be inflation adjusted – $14,000 per donee in 2013.

    Estate Tax rates increase with the maximum marginal rate to 40%.

    State Death Tax Deduction – maintained (not a credit).

    Portability – retained

    Generation Skipping Transfer Tax – the GSTT changes also continues without sunset.

  • Affordable care Act Taxes: While not part of the 2012 Act, there are several taxes that will be payable beginning in 2013. These taxes start at lower income thresholds than those under the 2012 Act.
    • 0.9% tax on earned income:
      • Employee tax – Employer not taxed but must withhold
      • Wages/Self-employed income in excess of
        • $250,000 married filing jointly
        • $125,000 married filing separately
        • $200,000 single (and other tax filing statuses)
      • 3.8% tax on “Net Investment Income”:
        • things like interest, dividends, net gains
        • Same income thresholds for 0.9% tax
      • Not indexed for inflation.

There are many more continuations and revisions in the American Taxpayer Relief Act of 2012. This summary is only some more popular concerns.

As always, consult with your personal tax and legal professionals to see how these changes and others may apply to you.

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HoganWillig

We Practice Law for Your Peace of Mind