Rene Sarkhosh, CPA
Congress and President Obama came to an agreement a few hours after the New Year, which means we technically did have a free-fall off the fiscal cliff! The agreement they came to is known as “HR 8,” the American Taxpayer Relief Act of 2012. It was signed into law on 1/1/13 by both the Senate and the House of Representatives. Here is a breakdown of the highlights and other tax issues for 2013.
Tax Rate Increase: Those who were taxed at the 35% rate will now be taxed at 39.6%. This applies to married couples with taxable income over $450,000. These same taxpayers will have their capital gains taxed at 20% – an increase from 15%.
It’s important to point out that, as part of the Affordable Care Act of 2010, Medicare tax will be increased or added to some incomes as of 1/1/13, including an increase of 0.9% for married couples with earned income of over $250,000. There is also a Medicare tax of 3.8% added to anyone with unearned income over $50,000.
California and New York taxpayers will be happy to know that the AMT Patch has been made permanent going back to 1/1/12. This means a larger deduction is taken out of your taxable income before calculating the AMT tax.
Washington, Nevada and Texas taxpayers, along with other states without state income tax, will be happy to know they can continue deducting sales tax as an itemized deduction – at least through 2013.
Mortgage insurance premiums will continue be deductable through 2013. However, phase outs of itemized deductions will begin as of 1/1/13, along with phase outs of personal exemptions. Those phase outs begin at $250,000 for single taxpayers and $300,000 for married couples.
The Marriage Tax Penalty is back in effect and that’s bad news for married people. As of 2013, the marriage penalty reliefs have expired as evidenced by the new phase out limits, AMT Patch deduction amount, and tax rate charts for joint filers compared to single filers.
Estate tax was the most anticipated part of the legislative change. While most financial professionals were convinced that estate asset limits of $5 million would be reduced to $1 – $3 million. Instead, it was the tax rate that increased from 35% to 40% on estates valued over $5 million.
There’s more good news for parents with young children: They still get the $1,000 Child Tax Credit if they qualify. Parents who support college kids will also have all of the education credits available to them.
Foreclosure/Short Sale: Depending on how you are looking at it, the following may also be good news: You will not incur extra taxable income if losing your home due to foreclosure or Short Sale. However, the portion of the loan forgiven above the home’s basis would still be taxable.
People with W-2 income will see tax increases with the loss of the 2% Social Security discount they have received for the past two years. While the 2% change takes affect immediately, higher wage earners will not see the decrease in their net check until after 2/15/13 as the IRS is providing time to employers and payroll processors to adjust payroll withholding charts.
Other miscellaneous items:
Educators still get a $500.00 above-the-line deduction for educator expenses.
Home builders can still receive credit for building energy-efficient homes.
Businesses can receive credit for reducing their carbon footprint by converting large buildings to be more energy efficient or by converting gas/diesel engines to alternative fuel use.
Those with IRAs who are making distributions to a charity still will receive a tax-free IRA distribution.
I hope this information helps you better understand the 2013 Tax Law changes. If you need further explanations, please contact our office at: (818) 980-0829 to make an appointment with Rene Sarkhosh, CPA.