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Congress Averts Fiscal Cliff

American Taxpayer Relief Act Passed Tuesday for President's Signature

Making up for lost time, Congress worked all day on New Year’s to pass legislation to avert the so-called Fiscal Cliff. The bill cleared both houses by wide margins. The legislation is vast and fresh, and will take some time to learn and understand. In the meantime, here are some of the high points:

Tax Issues of Interest to Individuals

  • All of the marginal tax brackets will be retained for 2013, with the addition of a new top rate of 39.6% which will apply to taxable income over $400,000 for single filers and $450,000 for joint filers.
  • Single filers with gross income above $250,000 ($300,000 for joint) will see a gradual elimination of their personal exemption and itemized deductions.
  • Capital gains will be taxed in three different tiers. A 20% rate will apply to those in the new 39.6% bracket, 15% for those in the middle brackets (25, 28, 33 and 35%) and a zero tax rate will still apply to those in the lowest 10% and 15% tax brackets.
  • The American Opportunity Tax Credit for college tuition (which was supposed to expire as of 12/31/12) has been extended through 2018.
  • Certain provisions that expired in 2011 have now been extended through 2013 including the sales tax deduction, the $250 classroom deduction for teachers, and the ability to make tax-free charitable donations direct from IRAs for those over 70 1/2 years old.
  • Certain residential energy tax credits, which expired on 12/31/11, were extended through 2013.

Not addressed in the legislation was the temporary lower 4.2% withholding rate for employee Social Security taxes. Thus, that rate has reverted back to the 6.2% rate and will remain there unless changed by future legislation.

Tax Issues of Interest to Businesses

  • The ability to write off the first $139,000 of equipment purchases (the "Section 179 Expense") was extended one more year through the end of 2013.
  • The ability to write off 50% of the cost of new equipment, the so-called "Bonus Depreciation" allowance, was also extended through the end of 2013.
  • The Research & Development ("R&D") tax credit was extended through 2013.

Note that these changes for individuals and businesses take effect in 2013. Virtually no changes were made to the existing tax rules for 2012 except for the Alternative Minimum Tax "patch" that had been expected all along. If you have questions about these changes, we'll do our best to answer and discuss their impact on your business.



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