Now that Congress has made some decisions on 2013 taxes, let's take some time to review what has changed for individuals and businesses.
First, as everyone has noticed, the employee portion of the Social Security payroll tax has increased. The temporary lowering of the rate to 4.2% has not been extended and has reverted to 6.2%. Employers and bookkeepers should expect some questions from employees about the sudden change in take home pay.
EGTRRA and JGTRRA collectively known as the Bush tax cuts expired at midnight on December 31 and the marginal rates of 10%, 15%, 25%, 28% 33% and 35% were retained and made permanent. A new top rate of 39.6% was added and applies to taxable income over $400,000 for those who file single, $425,000 for those file as head of household, $450,000 for married taxpayers who file a joint return and $225,000 for each spouse for married couples who file separately.
It is important to understand that the new top tax rate of 39.6% only applies to taxable income that is above your particular threshold. For example a married couple filing jointly with taxable income of $500,000 would continue to pay the old rate of 35% on the first $450,000 and would pay the new top rate of 39.6% only on the excess $50,000.
The phase-out of itemized deductions and personal exemptions was reinstated but with slightly higher thresholds. The new limits are:
Single Taxpayers $250,000
Heads of Household $275,000
Married Filing Jointly$300,000
The bane of accountants and tax software programmers the exemption amount for the Alternative Minimum Tax (AMT) is now permanently indexed for inflation. This means that there will no longer be a sword hanging over the heads of taxpayers each December and early January waiting for a patch. Relief from AMT for nonrefundable credits has been retained. The exemption amounts for 2012 are:
Single Taxpayers $50,600
Married Filing Jointly$78,750
The estate and gift tax exclusion limits have been retained with the taxable threshold of $5 million dollars for estates and is indexed for inflation going forward. Estates in excess of $5 million will be taxed at a top rate of 40%. The lifetime limit for gifts exempt from the federal gift tax is $1 million with a maximum rate of 55% for gifts totaling over $1 million.
A small handful of important credits that expired at the end of 2012 have been extended through 2018:
American Opportunity Tax Credit for qualified tuition and other higher education expenses.
Enhanced provisions for the Child Tax Credit.
Enhanced provisions for the Earned Income Tax Credit.
Congress also made permanent a rule excluding refunds from certain federal and federally assisted programs from taxable income.
A number of the temporary provisions from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) were made permanent and they include:
Marriage Penalty Relief
Child and Dependent Care Credit Rules
Exclusion for National Health Services Corps and Armed Forces Health Professions Scholarships
Student Loan Deductions
Coverdell Education Savings Accounts
Employer Provided Child Care Credit
Special Treatment for Tax-Exempt Bonds for Education Facilities
This is not an exhaustive list of all of the provisions of the American Taxpayer Relief Act but the most important and far reaching components of the changes affecting individual taxpayers. A separate set of changes have been made that affect businesses.
The American Taxpayer Relief Act extended a number of business tax credits through 2013 and also modified the credit for increasing research and development (Sec. 41) which had expired at the end of 2011.
The act's business changes include more then 30 credits and deductions ranging from the American Samoa Economic Development Credit to the Election to Expense Mine Safety Equipment. While the majority of business credits that were extended do no affect South Tampa businesses some do.
Following is a partial list of some of the items that have been extended:
Housing allowance exclusion for qualified residential rental projects.
New markets tax credit (Sec. 45D)
Employee wage credit for active duty military (Sec. 45P)
Work opportunity tax credit (Sec. 51)
15 Year straight-line cost recovery for leasehold improvements (Sec 168(e))
Reduction in S Corp recognition period for built-in gains tax (Sec 1374(d))
Empowerment zone tax incentives (Sec 1391)
An important provision of the Act is Section 179 which deals with expensing asset purchases. The section allows smaller businesses to write of the full cost of the purchase of a qualifying asset rather then depreciating them over several years. Before the act was passed the limit for 2012 was $125,000 with a phased out maximum of $500,000. The amounts were due to decrease by $25,000 and $200,000 for 2013 ATRA increased these amounts that applied in 2010 and 2011, $500,000 and $2 million.
ATRA extended the leasehold-improvement, restaurant and retail property to 2012-2013. Specifically the accelerated depreciation available for qualified improvements, allowing for a shortened recovery period of 15 yeas versus 39 years making it vital for business owners considering investments in leasehold improvements do so in 2013 in the event the break is not extended again.
The Work Opportunity Credit is intended to stimulate the hiring of certain disadvantaged groups and expired at the end of 2011 for most groups with an expanded credit for qualifying veterans having expired on December 31, 2012. The act extended the credit for most groups through 2013 non-disabled veterans $5,600. and $9,600 for disabled vets.
As with the examples above many of the credits that have been extended warrant at least consideration in planning purchases and expenditures over the next year and especially beyond as the credits will be expiring. Thoughtful and informed planning is vital for businesses especially at this transitive time.
I'm Justin Rosen an On Call Accountant serving South Tampa, Clearwater and the surrounding communities. Our goal is not only to complete the job needed in an accurate and timely manner but educate our clients to use the information gathered to enhance their business decisions. Visit us online at JRosenFDS.com
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