Congress
passes fiscal cliff act
January 2,
2013
Friends &
Colleagues:
The following
is an article from the American Institute of Certified Public Accountants
regarding the recent tax law changes. Congress has extended the Mortgage Debt
Relief Act through the end of 2013. There are several other provisions that
have changed as well. Please give our office a call with any questions or
concerns.
“The AICPA is
pleased that Congress has reached an agreement,” said Edward Karl, vice
president–Tax for the AICPA.” With some modifications targeting the wealthiest
Americans with higher taxes, the act permanently extends provisions of the
Economic Growth and Tax Relief Reconciliation Act of 2001, and Jobs and Growth
Tax Relief Reconciliation Act of 2003. It also permanently takes care of
Congress’s perennial job of “patching” the alternative minimum tax (AMT). It
temporarily extends many other tax provisions that had lapsed at midnight on
Dec. 31 and others that had expired a year earlier.
The act’s
nontax features include one-year extensions of emergency unemployment insurance
and agricultural programs and yet another “doc fix” postponement of automatic
cuts in Medicare payments to physicians. In addition, it delays until March a
broad range of automatic federal spending cuts known as sequestration that
otherwise would have begun this month.
Among the tax
items not addressed by the act was the temporary lower 4.2% rate for employees’
portion of the Social Security payroll tax, which was not extended and has
reverted to 6.2%.
Here are the
act’s main tax features:
Individual
tax rates
All the
individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%,
25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income
over $400,000 for single filers, $425,000 for head-of-household filers, and
$450,000 for married taxpayers filing jointly ($225,000 for each married spouse
filing separately).
Phaseout
of itemized deductions and personal exemptions
The personal
exemptions and itemized deductions phaseout is reinstated at a higher threshold
of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000
for married taxpayers filing jointly.
Capital
gains and dividends
A 20% rate
applies to capital gains and dividends for individuals above the top income tax
bracket threshold; the 15% rate is retained for taxpayers in the middle
brackets. The zero rate is retained for taxpayers in the 10% and 15%
brackets.
Alternative minimum tax
The exemption
amount for the AMT on individuals is permanently indexed for inflation. For
2012, the exemption amounts are $78,750 for married taxpayers filing jointly and
$50,600 for single filers. Relief from AMT for nonrefundable credits is
retained.
Estate and
gift tax
The estate
and gift tax exclusion amount is retained at $5 million indexed for inflation
($5.12 million in 2012), but the top tax rate increases from 35% to 40%
effective Jan. 1, 2013. The estate tax “portability” election, under which, if
an election is made, the surviving spouse’s exemption amount is increased by the
deceased spouse’s unused exemption amount, was made permanent by the act.
Permanent
extensions
Various
temporary tax provisions enacted as part of EGTRRA were made permanent. These
include:
- Marriage penalty relief (i.e., the increased size of the 15% rate bracket and increased standard deduction for married taxpayers filing jointly;
- The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one);
- The enhanced rules for student loan deductions introduced by EGTRRA;
- The employer-provided child care credit;
Individual credits expired at the end of 2012
The American
opportunity tax credit for qualified tuition and other expenses of higher
education was extended through 2018. Other credits and items from the American
Recovery and Reinvestment Act of 2009, that were extended for the same five-year
period include enhanced provisions of the child tax credit and the earned income
tax credit.
Individual
provisions expired at the end of 2011
The act also
extended through 2013 a number of temporary individual tax provisions, most of
which expired at the end of 2011:
- Deduction for certain expenses of elementary and secondary school teachers;
- Exclusion from gross income of discharge of qualified principal residence indebtedness (Sec. 108);
- Parity for exclusion from income for employer-provided mass transit and parking benefits;
- Mortgage insurance premiums treated as qualified residence interest;
- Deduction of state and local general sales taxes;
- Above-the-line deduction for qualified tuition and related expenses; and
Business tax extenders
The act also
extended many business tax credits and other provisions. Notably, it extended
through 2013 and modified the Sec. 41 credit for increasing research and
development activities, which expired at the end of 2011. The credit is modified
to allow partial inclusion in qualified research expenses and gross receipts
those of an acquired trade or business or major portion of one. The increased
expensing amounts under Sec. 179 are extended through 2013. The availability of
an additional 50% first-year bonus depreciation was also extended for one year
by the act. It now generally applies to property placed in service before Jan.
1, 2014 (Jan. 1, 2015, for certain property with longer production periods).
Foreign
provisions
The IRS’s
authority under Sec. 1445(e)(1) to apply a withholding tax to gains on the
disposition of U.S. real property interests by partnerships, trusts, or estates
that are passed through to partners or beneficiaries that are foreign persons is
made permanent, and the amount is increased to 20%.
New
taxes
In addition
to the various provisions discussed above, some new taxes also took effect Jan.
1 as a result of 2010’s health care reform legislation.
Additional hospital insurance tax on high-income
taxpayers. The employee portion of the hospital
insurance tax part of FICA, normally 1.45% of covered wages, is increased by
0.9% on wages that exceed a threshold amount. The additional tax is imposed on
the combined wages of both the taxpayer and the taxpayer’s spouse, in the case
of a joint return. The threshold amount is $250,000 in the case of a joint
return or surviving spouse, $125,000 in the case of a married individual filing
a separate return, and $200,000 in any other case.
For
self-employed taxpayers, the same additional hospital insurance tax applies to
the hospital insurance portion of SECA tax on self-employment income in excess
of the threshold amount.
Medicare tax on investment income. Starting Jan. 1, Sec. 1411 imposes a tax on individuals equal to
3.8% of the lesser of the individual’s net investment income for the year or the
amount the individual’s modified adjusted gross income (AGI) exceeds a threshold
amount. For estates and trusts, the tax equals 3.8% of the lesser of
undistributed net investment income or AGI over the dollar amount at which the
highest trust and estate tax bracket begins.
For married
individuals filing a joint return and surviving spouses, the threshold amount is
$250,000; for married taxpayers filing separately, it is $125,000; and for other
individuals it is $200,000.
Net
investment income means investment income reduced by deductions properly
allocable to that income. Investment income includes income from interest,
dividends, annuities, royalties, and rents, and net gain from disposition of
property, other than such income derived in the ordinary course of a trade or
business. However, income from a trade or business that is a passive activity
and from a trade or business of trading in financial instruments or commodities
is included in investment income.
Medical
care itemized deduction threshold. The
threshold for the itemized deduction for unreimbursed medical expenses has
increased from 7.5% of AGI to 10% 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% of
AGI.
Flexible spending arrangement. Effective for cafeteria plan years beginning after Dec. 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.
For a full
list of all changes or should you have any questions please contact our office
at 702-233-9526
Sincerely,
Jason D. Payan, CPA
Enclosures
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Letter01-02-2013.docx
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