THE AMERICAN TAXPAYER RELIEF ACT OF 2012
THIS fiscal cliff legislation includes lots of tax changes that could turn into a novel; accordingly, I summarized the provisions for simple reading. Even this condensed version is still long. In brief, the new law:
– Cancels most other income tax increases that would have resulted in added misery for all of us,
– Extends many popular tax breaks for individuals but forces higher-income folks to face higher taxes.
– Extended lots of business tax breaks as well.
Payroll tax holiday ended
– For 2011 and 2012, the Social Security tax withholding rate was temporarily reduced from 6.2 percent to 4.2 percent.
– The holiday ended 12/31/12. The Act does not extend the holiday through 2013.
Tax increases for higher-income individuals
Rates on Ordinary Income.
– For most, federal tax rates for 2013 will be the same as last year: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent.
– However, the Act increases the maximum rate for higher-income folks from 35 percent to 39.6 percent.
– For 2013, this change only affects singles, married filing jointly, heads of household, and married filing separately with taxable income above $400,000, $450,000, $425,000 and $225,000, respectively.
– After 2013, these taxable income amounts will be adjusted for inflation. These changes are permanent.
Rates on Long-term Gains and Dividends.
– Taxes on long-term capital gains and dividends will also remain the same as last year for most individuals.
– However, the Act increases the maximum rate for higher-income folks from 15 percent to 20 percent.
– For 2013, this change only affects singles, married filing jointly, heads of household, and married filing separately with taxable income above $400,000, $450,000, $425,000 and $225,000, respectively.
– After 2013, these taxable income amounts will be adjusted for inflation. These changes are permanent.
Personal and dependent exemption deduction phase-out is back.
– Sadly, the Act brings back phase-out provisions where your personal and dependent exemption write-offs can be reduced or even completely eliminated.
– For 2013, phase-out starts start when Adjusted Gross Income (AGI) reach $250,000 for singles, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married filing separate.
Itemized Deduction Phase-out is back too.
– You can lose up to 80 percent of your mortgage interest, state and local taxes, charitable contributions, and miscellaneous itemized deductions if your AGI (Adjusted Gross Income) exceeds the applicable threshold.
– The thresholds for 2013 are $250,000 for singles, $300,000 for married joint-filing couples, $275,000 for heads of household, and $150,000 for married individuals who file separate returns.
Tax breaks for families with children
Larger Child Tax Credit Made Permanent.
– The $1,000 maximum credit for each eligible under-age-17 child was made permanent.
– Provisions that allow the child credit to be refundable for more households were extended through 2017.
Favorable Child and Dependent Care Tax Credit Rules Made Permanent.
– Bush era tax cuts allowed most parents to claim a credit of up to $600 for costs to care for one under-age-13 child, or up to $1,200 for costs to care for two or more under-age-13 kids, so the parents can work.
– Lower-income parents have been able to claim larger credits of up to $1,050 and $2,100, respectively.
– The Act makes these credit amounts permanent for 2013 and beyond.
Favorable Earned Income Tax Credit extended
– Legislation enacted in previous years increased the earned income credit for families with three or more qualifying children and allowed married joint-filing couples to earn more without having their credits reduced.
– These changes were extended by the Act through 2017.
Liberalized Tax Breaks for Adoptive Parents Made Permanent.
– The Bush tax cut package liberalized the adoption tax credit and also established tax-free employer adoption assistance payments. These taxpayer-friendly provisions were scheduled to expire at the end of 2012.
– The Act permanently extends the more-favorable Bush era rules.
(Please refer to Part B for Business Provisions)
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Victor Santos Sy, CPA, MBA, provides professional services in accounting and tax controversy including IRS audit defense and offers in compromise. He also advises clients on choices of entity including corporations for small businesses and LLCs for rentals. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation at 704 Mira Monte Place, Pasadena, CA 91101. The firm celebrates its 35th anniversary this year. You may email tax questions to Vic at [email protected]. You are welcome to visit our website for more than 300 tax tips at www.victorsycpa.com.
