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:

• 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.

Tags: american taxpayer relief act, bush era tax cuts, tax law

The issue of a person’s legal place of residence has significance in matrimonial proceedings and other legal matters affecting where you can sue or be sued or where you must pay taxes among others. Legal residence is primarily a function of intent. To put it simply, your place of residence is where you intend it to be. When an issue arises such as residence for legal purposes, there are various factors that courts or other governmental agencies look at to determine your place of residence. Included in these factors are: where do you vote; what jurisdiction issued your driver’s license; where are your bank accounts; where do you or your children attend school; where do you own property; how much time do you spend in one state or another; where is your investment advisor; your doctor; your dentist?

The above tests help determine if your actual residence matches your declared intention. In some situations in New York, a bright line test is used. In determining if you are a NY residence for income or estate tax purposes , the Dept. of Taxation and Finance looks at the above factors, but if you spend too much time in the state, these factors make no difference. The same holds true for New York City income taxes.

Duration of residence is also important. In New York, a minimum of one years residence is necessary before commencing an action for divorce. For active duty military and their families, the state of legal residence is their declared “home of record.” This can be the state from which the serving member entered the service, or any other state in which they were, for a time, stationed. The home of record remains their state of legal residence until they declare an intention to establish legal residence elsewhere. This is true even if they are absent fro the state of declared residence for months or even years.

Tags: legal residence

Back in December 2010 there was a much reported flurry of work done on changes to the US Tax laws. One of the big changes was to increase the amount an individuals could pass free of estate or gift (“transfer”) taxes. The changes made it possible to pass during $5,000,000 you life or at death (or combination thereof) without paying either of the transfer taxes. This “exemption amount” was substantially more than in prior years. (The amount is adjusted for inflation and is $5,120,000 for 2012.) Additionally, the then new law made it possible for spouses to share this amount so that a surviving spouse could use any unused portion of a predeceased spouses $5,000,000.

This new exemption equivalent, along with the continued annual $13,000 annual exclusion, now made it possible for business owners and families with highly appreciated assets or businesses to pass substantial wealth to their families transfer tax free. That is not to say only people with more than $10,000,000 can benefit, but everyone with more than $1,000,000 in estate taxable items may find advantages. (more…)

Tags: Estate Tax, federal gift exemption, gift tax, gifting, lifetime gift, tax laws, transfer tax

As April 17, 2012 approaches; tax day for the 2011 Individual Income Tax, the question becomes, “file or don’t file my return?” Setting aside tax protest issues – sternly addressed by courts, this question often arises when a taxpayer does not have the money to pay their tax bill. This inability to pay is never acceptable to the IRS as “reasonable cause” not to file your return.

Failing to file your return on time results in some serious penalties and interest on any tax due. The “failure to file penalty” is 5% per month on the tax due, capped at 25% of the tax due. There is also interest charged each month on the tax due – and the penalty. Additionally, the interest never caps and continues to accrue until full payment is made. (more…)

Tags: failure to file, failure to pay, file on time, tax day, tax return

The news is full of talk about President Obama wanting to repeal “The Bush Tax Cuts” for the wealthy. Also, the compromise tax law that passed at the end of 2010 is scheduled to expire or “sunset” on December 31 of this year – sort of automatically repealing the tax cuts for everyone. But what are the tax cuts? How will the changes look basically? That is the key.

1.  Income Tax:

The personal income tax rates would revert to 2001 levels, so:

• Current rates – 10%, 15%, 25%, 28%, 33%, and 35%
• Revert to old rates – 15%, 28%, 31%, 36%, and 39.6%

Capital gains rates would also revert to 2001 levels as well. Short term capital gains (assets held less than one year) would continue to be taxed the same as the ordinary rate. Long term gains (assets held a year or more) would see higher capital gains taxes. (more…)

Tags: adoption credit, bush era tax cuts, capital gain, dependent care credit, dividends, Estate Tax, income tax, marriage penalty, state death tax credit

As we approach the year’s end, it is not too late to do some 2011 tax planning. Please consider the following suggestions from the IRS that may be helpful. If you have questions about how these issues might apply to your tax situation, please contact Carly Speyer or Stacy Bechakas at 716.636.7600 to discuss.

The IRS wants to remind all taxpayers that with the New Year fast approaching, there is still time for you to take steps that can lower your 2011 taxes. However, you usually need to take action no later than Dec. 31 in order to claim certain tax benefits.

Here are six tax-saving tips for you to consider before the calendar turns to 2012: (more…)

Tags: 2011 taxes, charitable contributions, lower taxes, portfolio adjustment, tax benefits

On June 9, the Consumer Assistance to Recycle and Save Act was passed by the US House of Representatives. The intent of the legislation is to reduce the number of inefficient vehicles on the road while, of course, spurring vehicle sales for the troubled auto industry. (more…)

Tags: Cash for Clunkers, Consumer Assistance to Recycle and Save Act, fuel efficiency program