THE AMERICAN TAXPAYER RELIEF ACT OF 2012
Tax breaks for education expenses
American Opportunity Higher Education Tax Credit extended
The American Opportunity Credit, which can be worth up to $2,500 and can be claimed for up to four years of undergraduate education, was extended by the Act through 2017.
College tuition deduction extended
-This write-off, which can be as much as $4,000 or $2,000 for higher-income folks, expired at the end of 2011.
-The Act retroactively restores it for 2012 and extends it through 2013.
Favorable Student Loan Interest Deduction Rules made permanent
-This deduction with a max of $2,500 (whether you itemize or not) was scheduled to be hit with a 60-month limit on deductible interest and a stricter phase-out provision would have reduced or eliminated the deduction.
-The Act permanently extends the favorable rules that have applied in recent years.
Favorable Coverdell Education Savings Account Rules made permanent
-For 2013 and beyond, the maximum annual contribution was scheduled to drop from $2,000 to $500.
-The Act makes the old favorable rules that have applied in recent years permanent.
Tax breaks for your residence
Tax-free treatment for Forgiven Principal Residence Mortgage Debt extended
-A forgiven debt generally counts as taxable Cancellation of Debt (COD) income.
-Temporary exception applied to COD income from cancelled mortgage debt used to acquire a main home.
-Up to $2 million of COD income of acquisition debt that was cancelled in 2007–2012 was tax-free.
The Act extends this break to cover eligible debt cancellations that occur in 2013.
$500 Energy-efficient Home Improvement Credit extended.
-Taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal home.
-This break expired at the end of 2011, but the Act retroactively restores it for 2012 and extends it through 2013.
Mortgage insurance premium write-off extended.
-Premiums for qualified mortgage insurance on debt to acquire, construct, or improve a first or second residence were treated as deductible qualified residence interest through 2011.
-The Act retroactively restores the break for payments in 2012 and extends it to cover premiums paid in 2013.
Other individual tax breaks
Option to deduct state and local sales taxes extended.
-In past years, individuals who paid little or no state income taxes were given the option of instead claiming an itemized deduction for state and local sales taxes.
-The option expired at the end of 2011, but the Act retroactively restores it for 2012 and extends it through 2013.
$250 deduction for K-12 Educators’ Expenses extended.
-The $250 deduction for teachers and other K-12 educators for school-related expenses paid out of their own pockets was retroactively restored for 2012 and extended through 2013.
Alternative Minimum Tax Patch made permanent
-Congress made annual patch rituals to prevent millions from getting socked with this add-on tax.
-The Act makes the patch permanent, starting with 2012.
-For 2012, the AMT exemption amounts are $50,600 for unmarried individuals, $78,750 for married joint-filing couples, and $39,375 for married individuals who file separate returns.
Relatively Favorable Gift and Estate Tax Rules made permanent
-For 2013 and beyond, the Act permanently installs a unified federal estate and gift tax exemption of $5 million—adjusted annually for inflation—and a 40% maximum tax rate (up from last year’s 35% rate).
-For 2013, the inflation-adjusted exemption amount is expected to be around $5.25 million.
-The Act also makes permanent the right to leave your unused federal estate and gift tax exemption to your surviving spouse (exemption portability deal).
(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.