Averting the Fiscal Cliff
After much ado, the “Fiscal Cliff” has been averted, and the American Taxpayer Relief Act of 2012 (“ATRA” or “The Act”) has become a reality. But while The Act addresses tax related issues relevant to 2012 and 2013, the spending cut issues are far from settled.
For Businesses –
Tax tools such as expanded section 179 limits and bonus depreciation have been very beneficial for businesses in terms of tax deferral, and their reduction and/or expiration are likely to bring unwelcome tax liabilities to those who have used these deferral methods over the last several years. As tax rates increase for some in 2013, strategic use of these tools may help to manage tax liabilities, which may include accelerating income into 2012.
Business Tax Extenders provided in The Act include:
Section 179: ATRA extends the $500,000 limit for fixed asset purchases (including off-the-shelf computer software) through the end of 2013. The deduction begins to phase out dollar for dollar once total fixed assets placed in service exceed the $2,000,000 investment limit. This extension allows businesses to take advantage of higher limits for both 2012 and 2013, as the dollar limit for 2012 was previously set at $125,000 with a $500,000 investment limit. Section 179 applies to both new and used equipment purchases.
Bonus Depreciation: Set to expire at the end of 2012, ATRA extends 50% bonus depreciation for assets placed in service through 2013, with some transportation and longer period production property eligible through 2014. Used equipment does not qualify for bonus depreciation.
Work Opportunity Tax Credit: ATRA extends the Work Opportunity Tax Credit (WOTC), which provides a credit for employers that hire individuals from targeted groups, through 2013.
For Individuals -
Extenders for Individual Taxpayers provided in The Act include:
Social Security: The 2% social security “holiday” that wage earners enjoyed over the past two years wasnot extended. Therefore, the employee social security rate for 2013 has reverted back to its previous rate of 6.2%. (The social security tax limit for 2013 is $113,700.)
Individual Tax Rates: Marginal rates for taxpayers earning less than $400k single or $450k for joint filers will not change for 2013 (other than the brackets being indexed for inflation). The marginal tax rate for earnings in excess of these thresholds will rise from 35% to 39.6%.
Capital Gains and Qualified Dividends: For taxpayers below the $400k/$450k thresholds, long-term capital gains and dividends will remain taxable at 15%. For taxpayers above the thresholds, tax rates will increase from 15% to 20%. Combined with the 3.8% net investment income tax that some taxpayer’s will be subject to this year, the top rate for capital gains and qualified dividends will be 23.8%.
Alternative Minimum Tax (AMT): The bill retroactively adjusts the AMT patch for 2012 to $50,600 for individuals and $78,750 for joint filers, which should help many middle-income taxpayers avoid being subject to AMT. ATRA provides for indexing of the patch going forward.
Personal Exemption and Itemized Deduction Phase Outs: The personal exemption phase-out is back, but only for taxpayers earning more than $250k single and $300k joint. Likewise, the phase out of itemized deductions will return for individuals earning over these same amounts. These provisions allow additional tax revenue for the over $250k wage earners, without increasing the tax rate, by reducing allowable deductions.
Education: With regard to education-related provisions, ATRA permanently extended the expanded Coverdell Account contribution limits, retained the student loan interest deduction and extended the American Opportunity Tax Credit for five years.
Emergency Unemployment Compensation (EUC): ATRA extends, for one year, the federally funded program that provides unemployment benefits to individuals who have exhausted regular state benefits.New Roth Possibilities: ATRA provides an important retirement planning opportunity for taxpayers. Until now, 401(k), 403(b) and 457(b) plan participants could convert funds from these retirement accounts to Roth, but subject to certain qualifying events or age restrictions. ATRA has lifted most restrictions, thereby allowing participants to roll funds to designated Roth accounts in the same plan at any time. This change was enacted as a revenue generator, as converting retirement funds to a Roth constitutes a taxable event.
For Estates –
The Act provides for a maximum federal estate tax rate of 40 percent with a $5 million exclusion (to be indexed annually for inflation) for decedents dying after December 31, 2012. This reduces the federal estate tax rate which was scheduled to revert to 55 percent (with a $1 million exclusion) effective January 1, 2013. The Act also makes portability of any unused exclusion between spouses permanent. This benefit was set to expire January 1, 2013.
Additional Provisions –
The act contains a number of additional provisions for both businesses and individuals. Be sure to check with your tax advisor if there is something relevant to you that has not been mentioned here.
On The Spending Side –
The American Taxpayer Relief Act provides a two month delay for sequestration, the across-the-board spending cuts imposed as a part of the Budget Control Act of 2011, which were to be effective after 2012. Left alone, the automatic spending reductions will become effective March 1, 2013. However, there’s no doubt that these across-the-board spending cuts will continue to be a major topic of discussion and debate during January and February, along with related discussions regarding control of the national debt ceiling. The fun continues….
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2013 Tax Due Dates:
January 31st –
1099 forms due to recipients
W-2 forms due to employees
4th quarter and year-end 2012 employer payroll tax returns due