New Tax Rates for 2013

Taxes are going up and spending cuts are on hold until March. As predicted, our elected representatives in Washington D.C. are unwilling to deal with the reality of our budget deficits. We have a financial crisis that no amount of tax increases will solve unless we make serious spending cuts. This assumes our elected officials have the intestinal fortitude to put the country above their own self-interests i.e., re-election. So our government has done the one thing it is great at – kick the can down the road and let someone other elected representative deal with the problem while this country buries itself further in debt.

Significant aspects of H.R.8, the “American Taxpayer Relief Act” (the “Act”):

Personal Income Tax Rates. For tax year 2013 and thereafter, any income in excess of $450,000 for joint filers, $425,000 for heads of household, $400,000 for single filers and $225,000 for married taxpayers filing separately the tax rate will increase to 39.6% for any income in excess of this rate.

Capital Gains/Dividends. Long-term capital gains and “qualified dividends” will increase to 20% for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). When combining the Obama Care 3.8% surtax on investment-type income and gains for tax years beginning after 2012, the overall will be 23.8%.

For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will permanently be subject to a 0% rate. Taxpayers who are subject to a 25%-or-greater rate on ordinary income, but whose income levels fall below the $400,000/$450,000 thresholds, will continue to be subject to a 15% rate on capital gains and dividends. (Note that your capital gains tax rate is determined by adding your capital gains into income to determine your ordinary income tax rate then applying the appropriate capital gains rate.)

Estate and Gift Taxes. The Act retains the 2012 estate and gift tax exemption amount of $5 million (adjusted for inflation) but increases the federal estate and gift tax rates on transfers in excess of this amount from 35 to 40 percent. For 2013, the inflation-adjusted exemption amount is expected to be $5.25 million. The Act also continues the portability feature of the estate tax law, which allows a surviving spouse to utilize his or her deceased spouse’s unused exemption amount.

PEP limitations to Apply to “High-Earners. The Personal Exemption Phaseout (PEP), which previously had been suspended, is reinstated with a starting threshold of adjusted gross income (AGI) above $300,000 for joint filers and surviving spouses, $275,000 for heads of household, $250,000 for single filers and $150,000 for married taxpayers filing separately. Under the phaseout, the total amount of exemptions that may be claimed by a taxpayer who is subject to the limitation is reduced by 2 percent for each $2,500 (or a portion thereof) by which the taxpayer’s AGI exceeds the relevant threshold. These dollar amounts will be inflation-adjusted for tax years after 2013.

Pease limitations to Apply to “High-Earners”. The “Pease“ limitation on itemized deductions, which had previously been suspended, with a starting threshold of AGI above $300,000 for joint filers and surviving spouses, $275,000 for heads of household, $250,000 for single filers and $150,000 for married taxpayers filing separately. Thus, for taxpayers subject to the “Pease” limitation, the total amount of their itemized deductions is reduced by 3 percent of the amount by which the taxpayer’s AGI exceeds the threshold amount, with the reduction not to exceed 80 percent of the otherwise allowable itemized deductions. The Pease limitation affects all deductions, including the charitable donation deduction and the deduction for home mortgage interest.

Example
Single filer with no dependents and AGI = $300,000: AGI exceeds the phaseout threshold by $50,000 (= $300,000 – $250,000); 3 percent of $50,000 is $1,500. Itemized deductions may be reduced by $1,500, up to a maximum of 80% of itemized deductions.

Alternative Minimum Tax (AMT). The Act provides some permanent AMT relief for tax years 2012 and later by retroactively increasing the applicable exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. Also, prior to the Act, nonrefundable personal credits, other than the adoption credit, the child credit, the savers’ credit, the residential energy efficient property credit, the non-depreciable property portions of the alternative motor vehicle credit, the qualified plug-in electric vehicle credit and the new qualified plug-in electric drive motor vehicle credit, were allowed only to the extent that the individual’s regular income tax liability exceeded his tentative minimum tax, determined without regard to the minimum tax foreign tax credit. Retroactively effective for tax years beginning after 2011, the Act permanently allows an individual to offset his entire regular tax liability and AMT liability by the nonrefundable personal credits.

Exclusion of Small Business Capital Gains. Generally, non-corporate taxpayers may exclude 50 percent of the gain from the sale of certain small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009 and on or before September 27, 2010, the exclusion is increased to 75 percent. For stock acquired after September 27, 2010 and before January 1, 2011, the exclusion is 100 percent and the AMT preference item attributable for the sale is eliminated. The Act extends for one year the 100 percent exclusion of the gain from the sale of qualifying small business stock through 2013.

Other Miscellaneous Deductions and Credits.

The Act also extends for five years the American Opportunity Tax Credit. For many taxpayers this dollar-for-dollar credit is worth up to $2,500.

The Act also would extend for five years the current versions of the Child Tax Credit and Earned Income Tax Credit, which are claimed by many lower-income workers making up to approximately $50,000.

The Act includes a one-year extension of current “bonus” depreciation rules, which allow businesses to deduct up to 50 percent of the cost of a wide variety of property and equipment, excluding real estate.

Additionally, the Act extends through 2013 the exclusion of certain income from the discharge of qualified principal residence indebtedness.

The Act also extends several energy-related tax credits for an additional year, including a wind tax credit and a credit for certain plug-in electrical vehicles.

Increase in Employee-Paid Payroll Taxes. The two percent payroll tax holiday that taxpayers have enjoyed for the past two tax years is allowed to expire under the Act (the reduction had decreased the rate from 6.2 to 4.2 percent). For an individual earning the maximum 2013 cap of $113,700 or more, this increase will amount to $2,274 in 2013.

Unemployment Benefits. The Act includes a one-year extension of unemployment insurance benefits.

Spending Cuts. Under the Act, the $1.2 trillion in automatic spending cuts that were scheduled to take effect and would have affected the Pentagon and many other domestic programs are delayed for two months, paid for by a reduction in the discretionary spending cap for 2013 and 2014.

Please call us 773-728-1500 if you have any questions!!

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SMART TAX MOVES BY THE END OF THE YEAR

The annual scramble to make smart tax moves before Dec. 31 is proving especially vexing this year, here are some of our CPA in Chicago suggestions.

Congress still hasn’t settled 2013 tax rates on income, investments, large gifts and estates. Deductions and other breaks are also in doubt, now that politicians from both parties are calling for cutbacks—although in different ways.  Many questions remain unanswered even for the 2012 tax year. For example, the Internal Revenue Service on Nov. 13 warned lawmakers that if they don’t act soon, the alternative minimum tax, which reduces the value of some tax breaks, will apply to 33 million households for 2012 rather than four million. More than 60 million people might not be able to file returns or receive refunds until late March, the IRS says, because it would have to reprogram computers.

Yet despite the uncertainties, year-end tax planning is possible and it will impact your Income Tax. We do know that 2013 will mark the debut of the 3.8% flat levy on net investment income for joint filers with adjusted gross income of $250,000 or more ($200,000 for singles). Congress passed this levy, plus a 0.9% increase in Medicare tax for affluent earners, to help fund the massive 2010 health-care changes. The tax introduces new layers of complexity into investors’ planning. (For more details, see box on this page.)

Big unknowns include the top rates on long-term capital gains and qualified dividends, both now 15%. The rate on gains could hit 23.8% or more, and the rate on dividends could be as high as 43.4%. .

There are few ways taxpayers can shrink 2012 taxes after Dec. 31, other than contributing to some retirement accounts or health savings accounts. Here are moves to consider before year end, plus a few to avoid.

  • Make charitable gifts. The best value often comes from donating appreciated assets, because donors can get a full deduction while skipping capital-gains tax on the asset’s growth. Cash donations to charities are often deductible up to 50% of adjusted gross income.
  • If you want to donate IRA assets to charity, wait a bit longer. Since 2006, IRA owners 70½ and older have been able to give up to $100,000 of the required payout directly to a charity. There’s no deduction, but no taxable income either. This wildly popular provision expired at the beginning of 2012, but lawmakers might yet reinstate it—as they did in 2010.
  • Make an extra mortgage payment, or pay down principal. Usually taxpayers can’t accelerate more than one month of mortgage interest, but that helps a bit if you think the mortgage-interest deduction will be curbed next year. Or find cash to pay down principal, which reduces overall interest.
  • Maximize contributions to employer-sponsored retirement plans. Unlike with IRAs, the deadline for 401(k) contributions is Dec. 31. This year, the employee limit is $17,000, or $22,500 for workers 50 or older.
  • Harvest capital losses, up to a point. Investment losses can offset investment gains plus up to $3,000 of ordinary income, both for single and joint filers. Note that “wash sale” rules penalize buyers who acquire the same asset within 30 days of selling at a loss.
  • Use up funds in a medical flexible-spending account. They often don’t carry over, although some employers will allow workers to spend 2012 funds in the first weeks of 2013. Next year, the contribution limit will be $2,500, less than some employers now allow.
  • Accelerate medical expenses. The threshold for deducting these expenses, now 7.5% of adjusted gross income (10% for AMT payers), rises to 10% next year for most taxpayers. People who are 65 and older, however, can use the 7.5% threshold through 2016. This phase-in will be useful, say advisers, because most taxpayers claiming large medical deductions are in the final years of life. Note that the IRS’s list of what’s deductible is far broader than what insurance typically reimburses, extending to contact-lens solution, assisted-living costs and even special education.
  • Write next semester’s tuition checks before year end. The American Opportunity Tax Credit allows qualified taxpayers to get a benefit this year for next spring’s tuition if the payment is made before year end—even though the credit is set to expire for 2013.
  • Prepay state taxes. Deductions for state and local income, sales and property taxes are already disallowed by the alternative minimum tax, and they might shrink further next year, even if Congress reinstates the expired sales-tax deduction for 2012. Consider accelerating next year’s state tax payments if they don’t throw you into the AMT, in which case you’ll lose the write-off altogether.
  • Make gifts up to $13,000 to relatives or friends. Such gifts are tax-free, and the number of recipients isn’t limited as long as the value of each gift doesn’t exceed $13,000. Cash is often the best gift, as presents of assets such as stock carry their “cost basis” with them.
  • Contribute to 529 education savings accounts. Assets in these accounts enjoy tax-free growth, and withdrawals from them are tax-free when used for tuition and other qualified expenses. Some states also provide tax benefits to givers. These accounts also offer a rare benefit: Contributions leave the giver’s estate, yet he or she can take back the principal without penalty if the money is needed. Contributions do count toward the $13,000 gift limit, however.

Please call Accountants in Chicago at 773-728-1500. We can help you plan and get the right tax deductions.

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Thank Abraham Lincoln for the extra time to work on your taxes. (Creative Commons photo from USDAgov.)

IRS Extends 2012 Tax Deadline to April 17th

Attention, taxpayers! Yesterday the IRS announced that they are extending the tax deadline to April 17th, 2012. You have two extra days to file your tax return this year, and you may thank Abraham Lincoln.

Yes, you read that correctly.  Since 2005, Washington DC has officially celebrated a holiday called Emancipation Day.  The holiday is in commemoration of Abraham Lincoln’s freeing of the slaves in District of Columbia on April 16th, 1862.

The IRS treats District of Columbia holidays the same as federal holidays as far as taxes are concerned. The regular tax deadline–April 15th–falls on a Sunday.  Because Monday, April 16th is a holiday in Washington DC, April 17th is now the federal tax deadline.

If the two extra days still aren’t enough time for you, be sure to file an extension.  If you request an extension, your tax deadline will then be October 15th, 2012.

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