Issue 6 – January 2013
Happy New Year to all of you.
This newsletter is my special “Fiscal Cliff Issue” explaining some of the key provisions that were passed in the recent American Taxpayer Relief Act of 2012.
Unfortunately, our political representatives did not approve the bill until January 1, 2013 and it was signed in to law by President Obama on January 2, 2013. That has left no time to do any material tax planning for 2012 in response to the bill. However, as you will read in the newsletter there are some good and bad points for all of us.
Enjoy the newsletter.
Mark Smith, RTRP – January 2013
TOPICS IN THIS NEWSLETTER
Upcoming Dates For Your Diary
Tax Refunds Maybe Later In 2013
Arizona Use Tax No Longer Reported On Tax Return
New Loan Source Available For Arizona Businesses
American Taxpayer Relief Act Of 2012
January 10, 2013 – Employees must report to their employer all tips for December if they total more than $20.
January 15, 2013 – Individuals pay their fourth and final installment of estimated taxes for 2012.
January 30, 2013 – E-filing starts for 2012 individual tax returns. This is about two weeks later than normal. You can paper file before this date but it will take longer to receive any refund. In general e-filing is the best way to file your tax return. You can download a 2012 Tax Organizer from my web site.
January 31, 2013 – A whole string of tax forms need to be supplied to the recipients by today. These include W-2s for your employees, 1098, 1099 and W-2G.
January 31, 2013 – Deposit any FUTA tax owed for the 2012 year.
I am pleased to announce that I have now obtained my QuickBooks Online 2013 certification.
For a variety of reasons, your tax refund this tax season may take longer to arrive than you expected.
For more information on the possible delays read here…..
It turns out that the requirement to report your Arizona use tax on your income tax return was a one hit wonder. The reporting rule was repealed in the last Arizona legislative session so was only reportable on 2011 tax returns.
However, the use tax is still due and needs to be paid to the state and local cities.
Read how to report and pay your use tax here…..
If you are looking for a loan for your business, a new source became available in Arizona in December 2012.
It is the At Work For Arizona Business Loan Alliance. This is a consortium of local development agencies and banks that has made available $12 million on beneficial terms.
More details on this new loan source are here……
This act partly resolved the “Fiscal Cliff” by settling some of the outstanding tax issues for 2012 and beyond. There is good and bad news for all of us in the bill.
Firstly the good news. The bill brings a bit more certainty to the tax system so that meaningful tax planning can be undertaken. This includes:
- For most taxpayers the tax rates of the last few years have been made permanent
- The AMT patch has been made permanent
- The American Opportunity Credit has been extended for 5 years
Now the bad news. All people who are working, employed or self-employed, will be paying more tax in 2013. This is because the “Payroll Tax Holiday” was not extended and so earned income will suffer 2% more Social Security Tax than was paid in the last couple of years.
Here some examples of what this extra tax will be:
|Earned Income||Extra Tax For Year|
The extra tax is not a small amount, so it is something to bear in mind when you are budgeting your expenditure for 2013.
For higher income earners there are a number of other tax increases introduced by the act, which will be addressed below.
Other tax increases to remember are those introduced by the Affordable Care Act and which start in 2013. These are the 3.8% Net Investment Income Tax and the 0.9% Additional Medicare Tax. I will cover these in the next newsletter.
Also note that a number of the provisions below have only been extended to the end of 2013 meaning that some uncertainty remains for tax planning.
Effect Of Act On Individuals
Tax Rates – For most individuals their tax rates will remain the same as in previous years. i.e. 10%, 15%, 25%, 28%, 33% and 35%. However, for those with taxable income more than $400,000 single, $425,000 head of household or $450,000 married filing joint, their top tax rate will increase to 39.6%. In addition, these same higher income individuals will suffer a new 20% capital gains tax rate on long term gains. All other taxpayers will continue to pay 0% capital gains tax on long term gains if their marginal tax rate is 10% or 15% and 15% for other marginal rates. These capital gains rates also apply to qualified dividends.
AMT Permanent Patch – The Alternative Minimum Tax (AMT) has been patched for 2012 and beyond with the annual exemption amount to be indexed each year. In addition, nonrefundable tax credits can now be offset against the total regular tax and AMT. The exemption amounts for 2012 are $50,600 for unmarried individuals, $78,750 for married filing joint and $39,375 for married filing separate. This will be a big help for tax planning, as it will now be possible to make more meaningful multiyear forward projections for AMT.
Child Tax Credit – This has been permanently set at $1,000. In addition, the earnings threshold to qualify for the additional child tax credit has been set at $3,000 until the end of 2017.
Earned Income Credit – Various parts of this credit have been made permanent or extended to the end of 2017.
Adoption Credit and Assistance – This has been made permanent so that a credit can be claimed for up to $12,770 adoption expenses in 2013 or the same amount of employer adoption assistance received. This amount is indexed each year.
Child and Dependent Care Credit – This has been made permanent so that a credit can be claimed for up to $3,000 of costs for one qualifying individual or $6,000 for two or more.
American Opportunity Tax Credit – This very beneficial tax credit for undergraduates has been extended to the end of 2017.
Tuition and Fees Deduction – This has been reinstated for 2012 and extended to the end of 2013.
Employer Provided Education Assistance – Tax free education assistance from an employer has been permanently set at $5,250.
Teacher’s Classroom Expense Deduction – This maximum deduction of $250 has been reinstated for 2012 and extended to the end of 2013.
State and Local Sales Tax Deduction – This deduction which can be taken instead of state income tax has been extended to the end of 2013.
Exclusion Of Cancellation Of Indebtedness On Principal Residences – This has been extended to the end of 2013. This will help those homeowners who are still struggling and face foreclosure or a short sale.
Mortgage Insurance Premiums – Certain premiums can be deducted as mortgage interest. This deduction expired at the end of 2011 and has now been extended for 2012 and 2013.
Limitation On Itemized Deductions – For higher income individuals there will be a reduction in the amount of itemized deductions they can claim. This will apply where adjusted gross income (AGI) exceeds $300,000 for married filing joint, $275,000 for head of household, $250,000 for unmarried and $150,000 for married filing separate.
Phase-out Of Personal Exemption – The personal exemptions claimed by higher income individuals will be phased out if their AGI exceeds certain limits. These are $300,000 for married filing joint, $275,000 for head of household, $250,000 for unmarried and $150,000 for married filing separate.
Federal Estate and Gift Taxes – For most individuals Federal estate and gift tax will continue to not be an issue. The death and lifetime limits are retained at $5,000,000 with a new tax rate of 40%. In addition, the married couple portability rule has been made permanent so that the unused part of a deceased spouse’s limits can be transferred to the surviving spouse.
IRA Distributions To Charity – For individuals over the age of 70 1/2 up to $100,000 can be distributed tax free from an IRA to a charity. This has been extended for 2012 and 2013. Due to the late passing of the act, any such distributions made in January 2013 can be treated as made on December 31, 2012. Similarly, any distribution made to the individual in December 2012 will qualify if transferred to a charity by February 1, 2013.
Effect Of Act On Businesses
Section 179 Expensing – This is the provision that allows businesses to claim a 100% deduction for capital expenditure. It was due to be significantly reduced in 2013. The act restores the more beneficial limits of $500,000 and $2,000,000 investment limit for 2012 and 2013. Most profitable small businesses should be able to continue making full use of this deduction.
Bonus Depreciation – In some circumstances, this can be a more beneficial business deduction for capital expenditure. For most asset types the 50% bonus depreciation has been extended to the end of 2013.
Research Tax Credit – This has been extended for 2012 and 2013.
Work Opportunity Tax Credit – In 2012 this was only available for employing certain veterans. It has now been extended to the end of 2013 and includes the targeted employees that were previously covered by the credit before 2012.
Qualified Leasehold, Retail Improvements and Restaurant Property – The 15 year recovery period for expenditure on these items has been extended to the end of 2013.
100% Exclusion For Gain On Sale Of Qualified Small Business Stock – This very beneficial exclusion for business owners has been extended to the end of 2013.
Disclaimer – This newsletter does not constitute personal accounting or tax advice to the reader and is only offering general information. You should seek professional advice for your own situation as the most appropriate accounting or tax planning depends on your personal and unique circumstances.
The IRS does not endorse any particular individual tax return preparer. For more information on tax return preparers go to IRS.gov.