As you no doubt heard in the news, Congress narrowly avoided the so-called “fiscal cliff” by passing last-minute legislation on New Years’ Day; the 157-page bill was signed by the President on January 2. It does not truly resolve the country’s deficit/debt issues at all, but did at least avoid or postpone a number of automatic scheduled tax increases and spending cuts. The bill has a large and wide ranging number of tax provisions, and will probably affect nearly everyone filing a tax return.
Perhaps the most notable provision is what was NOT extended: The two percent reduction in the employee’s share of Social Security taxes, passed as stimulus relief, was allowed to expire as of 1/1/2013. Employees will see their paychecks shrink by 2% of gross wages up to the FICA limit, and employers doing payroll in-house need to be sure that their systems are ready for the change. (If you are an employer using Quickbooks®, so long as you have downloaded current payroll tax tables you are already set.)
A very brief summary of individual provisions in the Bill, most of which are effective as of 1/1/2013:
- The “Bush tax cuts” that were scheduled to expire were, with modifications, extended. Rates for most taxpayers continue to range from 10% to 35%. However, taxpayers with income above $450,000 (joint), $425,000 (head of household), and $400,000 (single), will now be in a new 39.6% tax bracket.
- When contemplating tax rates, remember that investment income and capital gains are now subject to the additional 3.8% “Medicare tax”. This was not a part of the “fiscal cliff” bill but is effective for 2013 and later years, for taxpayers with income over $250,000 (joint) or $200,000 (single, head of household.)
- Capital gains will continue to be taxed at 15% for many taxpayers (and 0% for those in the lowest bracket), but higher income taxpayers (joint returns over $450,000) will see capital gains taxed at 20%.
- Qualified dividends will continue to be taxed at capital gains rates, but are subject to the additional 3.8% Medicare tax.
- Personal exemptions are phased out for higher incomes. Joint taxpayers with incomes over $300,000 (singles over $250,000) will begin losing the benefit of personal exemptions.
- Itemized deductions will again be partly phased out for higher income taxpayers.
- Big news: The alternative minimum tax exemption, which has required an annual Congressional “patch” for many years, is now permanently fixed at $78,750 (joint)/ $50,600 (single), with an annual adjustment in future years for inflation. This means this particular provision no longer requires annual “fixing” by Congress, and prevented the AMT from affecting about half of all taxpayers for 2012.
- The “American Opportunity Tax Credit”, the most favorable education tax credit, was retained at pre-2013 levels rather than seeing a significant reduction.
- The Child Tax Credit was retained at $1,000 rather than being halved to $500.
- The treatment of Mortgage Insurance Premiums as deductible home residence interest was retained; it would have expired.
- Gifts of qualified conservation easements are again given more favorable tax treatment (50% of taxable income limit rather than 30%, and 15 year carryforward rather than 5 years), for 2012 and 2013.
- The ability of those over age 70 ½ to make nontaxable transfers from IRA’s to charities was reinstated retroactively, with provisions to allow doing so retroactively for December 2012 withdrawals or to treat January 2013 withdrawals as 2012 withdrawals.
Key small business provisions:
- Bonus depreciation of 50% of eligible purchases was extended through 2013.
- The $8,000 (2012) applicable first-year depreciation increase for certain passenger vehicles was extended through 2013.
- Section 179 expense deductions for 2012 and 2013 are retroactively increased to as much as $500,000 per year for eligible property.
- The Work Opportunity Tax Credit was extended for eligible wages paid in 2013.
- And a variety of other provisions were extended or “tweaked”.
Estate and gift tax provisions:
- Great news: The $5,000,000 exclusion from estate tax was permanently retained and indexed for inflation; it’s expected to be approximately $5,250,000 for 2013. However, the federal estate tax rate was raised from 35% to 40% beginning with deaths in 2013.
- Even better, that same amount continues to apply to both the maximum lifetime gifts and the maximum exempt from generation skipping transfer taxes.
- For 2011-2012, Congress created “portability” of a predeceased spouse’s applicable exclusion amount: If the first spouse died without using his/her $5,000,000 exclusion amount, and the estate chose to elect to carry it over to the second spouse (by filing an estate tax return), the second spouse’s estate could benefit. This was to expire at 12/31/2012, but has been made permanent; as a result, many estates with surviving spouses should at least consider filing returns even if well under $5,000,000.
This is only the briefest of summaries of a very complex piece of legislation. Feel free to contact us to see how all this applies to your particular situation.