Over the New Year Holiday, Congress passed The American Taxpayer Relief Act of 2012. The new tax law extends several tax cuts for individuals and businesses; however, it also allows for tax rates to increase and some deductions to decrease for the nation’s “high income” earners. Most of the provisions will be adjusted for inflation in future tax years.
Individual Tax Provisions
- Top individual marginal tax rate increases to 39.6% (from 35%) for married couples earning $450,000 and single taxpayers earning $400,000.
- Long-term capital gains and dividends tax rate increases to 20% (from 15%) for taxpayers in the 39.6% tax bracket.
- Bush-era tax cuts are permanently extended for all taxpayers not in the 39.6% tax bracket.
- Personal exemptions and itemized deductions for married couples filing jointly earning over $300,000 and single taxpayers earning over $250,000 are phased out.
- The maximum estate tax rate to 40% (up from 35%) – the exemption amount remains at $5 million.
- The following have been extended through 2018:
- American Opportunity Tax Credit.
- Child Tax Credit – refundable portion for families with 3 or more children.
- Earned income tax credit – increased percentage.
- AMT Patch – “patches” the exemption amount for 2012 and adjusts for inflation going forward.
- The following are extended through 2013:
- Above the line deduction for educator expenses.
- Exclusion of cancellation of debt income from principal residences.
- Pre-tax deduction for employer-provided mass transit benefits.
- Deduction for mortgage insurance premiums as interest.
- Election to deduct state and local sales taxes in lieu of income taxes (itemized deduction).
- Above the line deduction for qualified education expenses.
- Tax-free charitable IRA distributions directed to charities for those over age 70 1/2.
Business Tax Provisions
- Extends through 2013 business tax provisions that expired at the end of 2011 including:
- Section 179 equipment expensing at $500,000 ($2,000,000 spending limit).
- Work opportunity credit.
- Research credit.
- Extends 50% bonus depreciation on purchase of new equipment through 2013.
- Extends through 2013 certain energy tax incentives that expired at the end of 2011 including:
- Energy efficient credit for existing homes and new homes.
- Alternative fuel vehicle refueling property credit, wind credit.
Even though the marginal tax rate increase is designed to affect taxpayers earning more than $400,000 (single) or $450,000 (married), the phase-out of the itemized deductions provides effective tax increase for those earning more than $250,000 (single) and $300,000 (married). Other tax provisions effective for 2012 include the expiration of the 2% Social Security tax reduction (increases back to 6.2% from 4.2%), which translates into a tax increase for all employees and self-employed individuals; Net Investment Income Surtax (3.8% of the lesser of net investment and passive income or the amount by which gross income exceeds $200,000 (single filers) or $250,000 (married – joint filers), and the Medicare Earned Income Surtax Tax (0.9% on “earned income” exceeding $200,000 for single filers and $250,000 for joint filers).
With the ever-changing tax landscape, it is important to have a business and tax advisor you can trust. At Alerding CPA Group, we specialize in helping businesses and individuals maximize their cash flow while reducing their overall tax liability. We will work with you to develop a fiscal plan to meet your professional and personal needs.
Please contact your Alerding CPA Group tax representative at 317-569-4181 for additional information. Visit our website: www:alerdingcpagroup.com.