As year-end approaches here is a quick overview of the provisions of as the American Taxpayer Relief Act of 2012 signed into law Jan. 2, 2013 and relevant state tax conformity. Please call or email if you have any questions or need to schedule a tax planning meeting.
- A Tax Increase on the Highest Incomes in 2013. Although most taxpayers avoided a tax increase, rates did rise for top earners who earn more than $400,000 ($450,000 for married taxpayers filing jointly) that will see their marginal tax rates increase to 39.6%. All other existing rates remain the same. Also, these taxpayers who have net investment income will face a 3.8% surtax on categories of certain unearned income, potentially increasing the total tax rate to 43.4%.
- Higher Capital Gains Rates for Top Earners. The same individuals who are subject to the new 39.6% top rate on income now face a 20% rate on capital gains and dividends, up from 15%. Taxpayers in the 10% and 15% income brackets have a zero capital gains rate and those in the middle will continue to pay 15%.
- Higher Personal Exemptions Phase-out. The phase-out for personal exemptions and itemized deduction return and but have been raised to $300,000 for married couples and $250,000 for individuals.
- Permanent AMT Inflation Indexing. After years of last-minute Alternative Minimum Tax “patches,” the new law permanently indexes the AMT to inflation starting in tax year 2012. Unfortunately, because of high state income and real estate taxes most couples earning more than $200,000 will still be subject to AMT.
- Tax Relief for Mortgage Loan Modifications. Taxpayers struggling to pay their mortgages, or whose home values have fallen below their purchase price, were given another year of tax relief on any qualifying “indebtedness income” they may receive as a result of a loan modification or short sale on their principal residence. Caution -California did not conform to this change.
- Medical Itemized Deductions. Taxpayers under age 65 will see their AGI haircut on medical deductions raised from 7.5% to 10%; those over age 65 (thank AARP) will retain the 7.5% for another three years. California does not conform to the increase.
- Business Changes. New hire credit for the state will end this year and Enterprise Zone credits will be reduced starting in 2014. For federal returns, employer health insurance credits are still available and attractive Section 179 and bonus depreciation (including real estate improvements) will end December 31st.