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How Will the “Fiscal Cliff” Legislation Affect You?
BY PAUL A. TREINEN, Tax and Advisory Services Partner, White Nelson Diehl Evans LLP
If the talks of the “fiscal cliff” did anything for us all, they at least provided a little needed frustration around the holidays and New Year, as if we needed more frustration! Lo and behold something positive came out of these negotiations; Congress passed and the President signed the American Taxpayer Relief Act (2012 Taxpayer Relief Act). The 2012 Taxpayer Relief Act (“TRA”) prevents many of the tax hikes that were scheduled to go into effect this year and retains many favorable tax breaks that were scheduled to expire. The TRA also increases income taxes for some high-income individuals and slightly increases transfer tax rates from 2012 levels.
Here are some of the key elements that apply to individuals:
• Single taxpayers with over $400,000 in taxable income or couples with over $450,000 in taxable income (“top-bracket taxpayers”) will see their maximum tax rate rise to 39.6% from 35% in 2012. For income earned below these levels, the 2012 rates are permanently extended and will remain the same.
• The personal exemption, which in 2012 was $3,800 per person, is phased out for couples with $300,000 or more of adjusted gross income, or singles with $250,000 or more.
• The “Pease” limitations which were eliminated for years 2010 – 2012 are reinstated for couples with adjusted gross income above the $300,000 threshold, and single persons above $250,000. This provision affects all deductions, including charitable donations and mortgage interest.
• As it relates to long-term capital gains and qualified dividends, the 15% rate would continue to apply to taxpayers in the 25%, 28%, 33% and 35% income tax brackets. People in the 10% and 15% brackets would continue to have a zero rate on long-term capital gains and qualified dividends. Rates on long-term capital gains and dividends for top-bracket taxpayers rise to 20% from 15%. When accounting for the new “Obamacare” surtax of 3.8% on investment-type income and gains for tax years beginning after 2012, the overall rate for higher-income taxpayers on long-term capital gains and qualified dividends will be 23.8%.
• The TRA permanently fixes the “AMT Patch” which is now set at $78,750 for couples and $39,375 for single Taxpayers and is indexed for inflation. Without this permanent patch, it was estimated that an additional 28 million households would have been subject to the alternative minimum tax in 2012.
• The estate and gift-tax exemption will remain at $5 million (adjusted for inflation) per individual.
• The current 35% top tax rate on amounts above the estate and gift-tax exemption increases to 40%.
• The bill extends for five years the American Opportunity Tax Credit and the current versions of the Child Tax Credit and Earned Income Tax Credit.
• The Social Security portion of payroll taxes for all employees will rise by 2 percentage points. This is the end of the so-called “payroll tax holiday”. The rate will return to 6.20% on all wages under the social security threshold ($113,700 for 2013).
Here are some of the key elements that apply to businesses:
• The TRA includes a one-year extension of current “bonus” depreciation rules, which allow businesses to deduct up to 50% of the cost of a wide variety of property and equipment, excluding real estate.
• Retroactively effective for tax years beginning in 2012, the TRA increases the maximum expensing amount under Code Sec. 179 from $139,000 to $500,000. Effective for tax years beginning in 2013, the act increases the maximum expensing amount from $25,000 to $500,000. Furthermore, the act also increases the investment-based phase-out amount for tax years beginning in 2012 or 2013 to $2,000,000.
• The TRA retroactively extends for two years the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year MACRS class.
• The work opportunity credit (WOTC) has been extended so that it applies to eligible veterans and nonveterans who begin work for an employer before January 1, 2014.
• The TRA retroactively extends the research credit for two years so that it applies for amounts paid or accrued before Jan. 1, 2014. For tax years beginning after Dec. 31, 2011, the TRA liberalizes the research credit rules for persons that acquire the major portion of either a trade or business or a separate unit of a trade or business of another person.
• The TRA provides that for determining the net recognized built-in gain for tax years beginning in 2012 or 2013, the recognition period is the 5-year period beginning with the first day of the first tax year for which the corporation was an S corporation.