2012 American Taxpayer Relief Act Overview

 

The recently enacted 2012 American Taxpayer Relief Act is a sweeping tax package affecting many individual and business tax provisions.  Here's a look at some key elements of the package:

 

Individual Tax Rates 

For tax years beginning after 2012, the 10%, 15%, 25%, 28%, 33% and 35% tax brackets from the Bush tax cuts will remain in place and are made permanent. However, there will be a new 39.6% rate, which will begin at the following thresholds: $400,000 (single), $425,000 (head of household), $450,000 (joint filers and qualifying widow(er)s), and $225,000 (married filing separately).

Estate tax

The new law permanently sets the exemption level at $5,000,000 (as indexed for inflation), and continues the portability feature that allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse.  It also permanently increases the top estate, gift, and GST rate from 35% to 40%. All changes are effective for individuals dying and gifts made after 2012.

Capital gains and qualified dividends rates

Beginning in 2013, the rate will be 0% if income falls below the 25% tax bracket; 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate; and 20% if income falls in the 39.6% tax bracket. It should be noted that the 20% top rate does not include the new 3.8% surtax on investment-type income and gains for tax years beginning after 2012, which applies on investment income above $200,000 (single) and $250,000 (joint filers) in adjusted gross income.

Personal exemption phaseout

Beginning in 2013, personal exemptions will be phased out (i.e., reduced) for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers). Taxpayers claim exemptions for themselves, their spouses and their dependents. Last year, each exemption was worth $3,800.

Itemized deduction limitation

Beginning in 2013, itemized deductions will be limited for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers).

AMT relief

The new law provides permanent alternative minimum tax (AMT) relief.  Retroactively effective for tax years beginning after 2011, the new law permanently increases the individual AMT exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. In addition, for tax years beginning after 2012, it indexes these exemption amounts for inflation.

Cost recovery

The new law extends the $500,000 Section 179 expensing limitation for eligible property placed in service in 2012 and 2013.  It also extends and modifies the 50% bonus depreciation provisions with respect to eligible property placed in service after Dec. 31, 2012, in tax years ending after that date.

Payroll tax cut is no more

The 2% temporary payroll tax cut was allowed to expire at the end of 2012.

Business Credits Extended

Credits extended through 2013 include:  Research tax Credit, Work Opportunity Tax Credit

 

Call us at (219) 769-3616 with your questions, or email them to tlynch@swartz-retson.com.

Additional HI Tax On High-Income Taxpayers Effective January 1, 2013

The Patient Protection and Affordable Care Act in 2010 will impose an additional

health insurance (HI) tax on the employee’s portion for high-income taxpayers after

2012. The employee portion of the HI (Medicare) tax is increased by an additional

tax of .9% on wages received in excess of $200,000 per individual (or $250,000

for couples filing jointly, $125,000 married filing separately).  The regular percentage

remains at 1.45% for wages under $200,000. The change is to the employee portion

of Medicare only.  Therefore, for taxpayers with wages in excess of the threshold amount, the overall HI rate will be 3.8% (i.e. 2.35% for the employee and 1.45% for the employer).

The employer is required to withhold the additional .9% tax on wages. The employer

could be subject to penalties for failure to deduct and withhold the additional tax. In

determining the employer’s requirement to withhold and liability for the tax,

only wages that the employee receives from the employer in excess of $200,000

for a year are taken into account and the employer must disregard the amount of wages received by the employee’s spouse. To the extent the additional tax is not collected by the employer, the employee shall pay such tax.

For example, if a taxpayer’s spouse has wages in excess of $250,000 and

the taxpayer has wages of $100,000, the employer of the taxpayer is not required to

withhold any portion of the additional tax, even though the combined wages

of the taxpayer and the taxpayer’s spouse are over the $250,000 threshold. In this

instance, the employer of the taxpayer’s spouse is obligated to withhold the additional

.9% HI tax with respect to the $50,000 above the threshold amount.

This same additional HI tax applies to the HI portion of self-employment (SECA)

tax on self-employment income in excess of $200,000 per individual ($250,000

married filing jointly, $125,000 married filing separately). The threshold is reduced

(but not below zero) by the amount of wages taken into account in determining the

FICA tax with respect to the taxpayer. The ½ of SECA tax deduction taken on page 1

of Form 1040 will not apply to the .9%.

The IRS will be releasing revised Form 941 forms for the 1st quarter of 2013

which will include a separate line for the additional HI (Medicare) withholding.

For more information on this change, go to the IRS website at http://www.

irs.gov/Businesses/Small-Businesses-&-Self-Employed/Questions-and-Answers-

for-the-Additional-Medicare-Tax.

Call us at (219) 769-3616 with your questions or e-mail them to
dvanprooyen@swartz-retson.com.
SWARTZ, RETSON & CO., P.C.