Highlights of Fiscal Cliff Tax Changes
Through many months of delay, debate, and finger-pointing, Congress and the White House have reached an agreement on various tax rate cuts that were set to expire in 2013 and would result in tax hikes for all taxpayers. The bill was signed into law by the President on January 2, 2013.
Here is a brief overview of selected tax provisions in this bill:
Provisions for Individuals:
- Current tax rates will be extended permanently for those with taxable income under $400,000 (single filing status) and $450,000 (married couples filing jointly). For those above these taxable income levels, the top tax rate will rise to 39.6 percent.
- Tax rate on capital gains and qualified dividends will be permanently extended at 15 percent for those under the above taxable income levels ($400,000 for single taxpayers and $450,000 for married taxpayers filing jointly). It will also remain at 0 percent for those taxpayers in the two lowest tax brackets of 10 percent and 15 percent.
- The tax rate on capital gains and qualified dividends will be increased permanently to 20 percent for those over the above taxable income levels ($400,000 for single taxpayers and $450,000 for married taxpayers filing jointly).
- The Personal Exemption Phase-out (PEP) and Pease adjustment (3 percent modification for itemized deductions) will also be re-imposed beginning in 2013. These limitations will apply to single taxpayers with Adjusted Gross Income (AGI) over $250,000 and married couples with AGI over $300,000.
- A permanent “patch” of the Alternative Minimum Tax (AMT) exemption was included in the bill. For 2012, the individual AMT exemption amount is increased to $50,600 for single taxpayers and to $78,750 for married couples filing jointly. Further, beginning in 2013, the AMT exemption (and other AMT amounts) will be indexed for inflation, so taxpayers will not need to worry each year if (and when) the AMT exemption will be patched.
- The special provision for tax-free distributions from IRAs to certain public charities for individuals age 70½ or older, not to exceed $100,000 per taxpayer per year, was also extended. This provision had expired at the end of 2011, but it will now be available for the 2013 tax year. Two special transitional rules apply for December 2012 and January 2013 regarding these charitable IRA distributions. To fall within these special rules, you must take certain actions on or before January 31, 2013. Hopefully, the IRS will issue expedited guidance on these special transition rules.
- The education tax credits for individuals were extended through 2017, and other individual tax credits, including the child tax credit and dependent care credit, were also extended.
- The deduction for state and local taxes was also extended through December 31, 2013, and will be available for individuals in 2012 and 2013.
- The estate tax exemption of $5,000,000 (as indexed for inflation it is $5,120,000 in 2012) was made permanent. Also, the top estate tax rate is set at 40 percent, up from the current tax rate of 35 percent for 2012, and it too was made permanent. The portability provision created and adopted in 2010 was also extended and made permanent. Although there is no official IRS guidance for the inflation adjustment, it would appear to be approximately $5.25 million per person in 2013. Note: the annual gift tax exclusion will be $14,000 per donee in 2013.
- One key item for employees that was not part of the bill concerns payroll taxes. The bill does not continue the 2 percent reduction in employee Social Security tax withholding that expired on December 31, 2012. Thus, this tax rate will revert back to its prior level of 6.2 percent for both employees and employers in 2013 (in addition to the 1.45 percent Medicare tax). All employees will see a rise in their Social Security tax in 2013 and, therefore, less net pay.
- Don’t forget, there is also the 0.9 percent medicare tax increase on earned income (wages and self-employment income) over $200k single/$250k married filing joint (MFJ) already set to begin in 2013, thanks to the healthcare bill.
- Don’t forget there is also the 3.8 percent “unearned income Medicare contribution tax” on higher income individuals (AGI >$200k single/$250k MFJ) taking effect in 2013, thanks to the healthcare bill. Unearned income is generally “net investment income” – interest, dividends, capital gains, annuities, royalties, rents and income from a business that is a passive activity.
Provisions for Businesses:
- The 50 percent bonus depreciation was extended for one year, and applies to qualifying additions made through December 31, 2013.
- The Section 179 expensing election was also extended for tax years 2012 and 2013. Further, the expensing amount was increased to $500,000 of qualifying additions with an overall cap on additions of $2,000,000 for both 2012 and 2013.
- The research and development (R&D) tax credit was also extended by this bill through December 31, 2013. Thus, the R&D tax credit will be available for the 2012 and 2013 tax years. Some modifications were also made in the calculation of the R&D credit when businesses are acquired.
- The period for imposing the Built-in Gains (BIG) tax for S corporations was retained at five years for 2012 and 2013. This special rule had expired at the end of 2011 and reverted back to a ten-year period (but is now back to a five-year period).
- The 100 percent small business stock exclusion had expired as of December 31, 2011. This exclusion was extended and now applies through December 31, 2013, if the specific requirements are satisfied under IRC Section 1202.
- There are a variety of other tax extender items contained in the bill, including several energy related measures.
- There were also several various Medicare and health care extensions contained in the bill. Included in these changes was an extension of the Medicare Physician Payment. This provision guarantees seniors have continued access to their doctors by fixing the Sustainable Growth Rate (SGR) through the end of 2013. Medicare physician payment rates were scheduled to be reduced by 26.5 percent on December 31, 2012. This provision avoids that reduction and extends current Medicare payment rates through December 31, 2013.
Note: Tax rates for C-corporations did not change. As more details are issued by Congress and the IRS, we will make these available to you.
For more information on the new changes, please contact Bob Kiser, Managing Partner of Moore Colson, at 678.385.6008 or [email protected].