As you are likely aware, Congress passed a new tax act on January 1, 2013 which has been signed by the President. First, here are a few changes, which were already signed into law and effective January 1, 2013.
1. The expiration of the 2% employee-side payroll tax cut. Effective January 1, employees and self-employed taxpayers return to paying 6.2% FICA tax rather than 4.2%
2. The 3.8% surtax on net investment income, including capital gains, for single filers with $200,000 AGI and joint filers with $250,000 AGI
3. The 0.9% surtax on wages or self-employment income exceeding $200,000 for single filers and $250,000 for joint filers
Following is a summary of the largest, most-impactful provisions of the new tax act.
Income Tax Rates
The reduced tax rates enacted in 2001 and 2003 are made permanent for all taxpayers other than the highest earners. For the latter, a new income threshold of $450,000 for joint filers, $400,000 for single filers, and $425,000 for head of household will apply, and these individuals will now pay 39.6% income tax on taxable income exceeding these thresholds. Previously, this rate was 35%.
Long-term capital gains and qualified dividends continue to be taxed at 15%, unless a taxpayer’s income exceeds the thresholds shown above, in which case such income would be taxed at 20%. The 0% rate on such income for lower-income individuals will continue.
The phase-out of personal exemptions and itemized deductions is reinstated at thresholds of $300,000 for joint filers, $250,000 for single filers, and $275,000 for head of household.
Historically, the exemption amounts for the alternative minimum tax had not been indexed for inflation, requiring Congress to pass a “patch” every year or two to prevent taxpayers from being subject to AMT merely because of income inflation. The exemption amounts are recalibrated to $78,750 for joint filers and $50,600 for single filers for 2012, and these exemptions will be indexed for inflation each year beginning in 2013.
Estate and Gift Taxes
The $5 million estate and gift tax exemption (adjusted for inflation after 2011) is made permanent, and the tax rate is raised to 40%. The portability law that allows a spouse to transfer his or her estate tax exemption to a surviving spouse is also made permanent.
Certain benefits that were enacted in 2001 that were scheduled to expire along with the reduced tax rates were made permanent. These benefits include the following:
1. Marriage penalty relief—increased size of 15% bracket and increased standard deduction for married joint filers
2. Child and dependent care credit of up to $3,000 for one dependent or $6,000 for more than one
3. Exclusion for employer-provided educational assistance
4. Enhanced rules related to the student loan interest deduction
Other benefits are extended for a temporary period of time and may be renewed from time to time if Congress determines the benefit is worth the cost. Below are benefits that are extended with the new legislation for businesses.
1. 50% bonus depreciation (Section 168)—extended to include new property placed in service by December 31, 2013
2. The Section 179-dollar limitation is restored to $500,000 for taxable years beginning in 2012 and 2013, with reductions if total additions exceed $2 million. The $25,000 dollar limitation now returns in 2014
3. Section 179 deductions for qualified real property—retroactively extended for 2012 and 2013
4. 15-year depreciation for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property—retroactively extended for property placed in service between January 1, 2012 and December 31, 2013
5. Reduction in S corporation recognition period for built-in gains tax to 5 years—retroactively extended to taxable years beginning in 2012 and 2013
6. 100% exclusion of gain from sale of small business stock under Sec. 1202—retroactively extended to qualified small business stock acquired between January 1, 2012 and December 31, 2012
7. Credit for increasing research and development activities—retroactively extended for 2012 and 2013
8. S corporation basis reduction for charitable contribution of property, reducing basis for adjusted basis of the property rather than for the deductible amount passed through—retroactively extended to contributions made between January 1, 2012 and December 31, 2013
9. Work Opportunity Tax Credit—retroactively extended to 2012 and 2013 (no longer applying only to qualified veterans in 2012)
Energy Tax Extensions
Several energy credits and provisions were extended, most of which had expired at the end of 2011. A couple of the most-used provisions are presented below.
1. Credit for energy-efficient improvements to existing homes (windows, doors, furnaces, water heaters, etc.) —retroactively extended for 2012 and 2013
2. New energy efficient home credit for contractors—retroactively extended for 2012 and 2013
Content contributed by Potter & Company, a local certified public accounting firm offering core services of audit, tax, business consulting and financial analysis. Content written by Eric Fletcher, CPA, Tax Director. For more information, contact him or John Kapelar, CPA, Partner, at 704-283-8189 or visit www.GoToPotter.com.