Important Tax Changes for IndividualsThe passage of The American Taxpayer Relief Act this past New Year’s Day created a new, higher tax bracket, while also extending and reinstating numerous key tax benefits for certain taxpayers. Whether these changes help or hurt your tax position, advance planning will be essential to understanding your options and guiding your actions for the balance of this year.
The tax brackets in effect for 2012 (10%, 15%, 25%, 28%, 33% and 35%) were permanently extended into 2013 and the foreseeable future. One new tax bracket, 39.6%, was added for individuals with net taxable income exceeding $400,000 ($450,000 for couples filing jointly).
Two new Medicare taxes take effect in 2013. For individuals who receive wages or earn income from self-employment, an additional .9% tax will apply when this income exceeds $200,000 ($250,000 for couples filing jointly). The second of the two Medicare taxes is a 3.8% tax on net investment income, such as dividends, interest, rent, annuities and capital gains. Individual taxpayers with adjusted gross income (AGI) over $200,000 (or couples with AGI over $250,000) could be subject to this tax.
Capital gain and dividend taxes were raised for some while relief was extended for others. To the extent a taxpayer is subject to the new, 39.6% tax bracket, the tax rate applicable to long-term capital gains and dividends will rise to 20% (formerly 15%). On the other hand, the rule that provides for tax-free capital gains and dividends for taxpayers in the lowest 10% and 15% tax brackets was retained and made permanent.
Up until 2012, taxpayers age 70 ½ or better could make charitable donations directly from their IRAs. Although the donation was not deductible, the distribution did not have to be reported as income. Even better, the direct donation could be used to satisfy the individual’s annual “required minimum distribution”. This provision has now been reinstated for all of 2013.
Tax breaks for college tuition, student loan interest, adoptions, mortgage insurance and forgiven mortgage debt, all of which were supposed to expire at the end of 2012 were extended for one or more years.
Extension of Tax Breaks for Businesses
By and large, most business taxpayers were braced for significant tax increases prior to passage of the Relief Act. Instead, most have been given a one-year reprieve because numerous tax breaks that expired in 2011 or were set to expire at the end of 2012, were retroactively reinstated for 2012 and extended through the end of 2013. These breaks include:
General Tax Planning Considerations
- Leasehold improvements made by a tenant or landlord for a building more than 3 years old can be depreciated over a 15-year period, rather than the 39-year period that would otherwise be applicable.
- Generous allowances for the expensing of most capital expenditures and certain real property were reinstated for 2012 and extended through the end of 2013. Up to $500,000 of qualifying property is eligible for expensing for both 2012 and 2013. Within that limit, a taxpayer can elect to expense up to $250,000 in certain qualifying leasehold improvements made during 2012 and 2013.
- Over and above these expensing provisions, business taxpayers can also expense up to 50% of the cost of new, original-use equipment as “bonus” depreciation.
Although each person’s tax situation is unique, there are several “rules of thumb” to think over:
- For taxpayers who have little income, it might make sense to accelerate income into 2013 to take advantage of the 10% tax bracket while we still have it. One example with long-term benefits would be the conversion of all or part of a traditional IRA to a ROTH IRA.
- Planning for the timing and amount of long-term capital gains takes on added significance this year. With three sets of tax rates – 0%, 15% and 20% - as well as the new 3.8% Medicare tax, techniques to accelerate or defer capital gains (as the case may be) can make a huge difference in the amount of after-tax proceeds a taxpayer can reinvest.
- Businesses should not overlook the temporary extension of the generous expensing allowances in planning their capital expenditures for 2013.
- Businesses that are experiencing a recovery in revenues and profits should take a fresh look at their retirement plans and benefit programs. With unemployment levels decreasing, reinstating past benefits may just be the golden handcuffs needed to retain talent.
These are just some of the planning considerations to help you save tax dollars. To determine exactly how these changes affect you and your business, contact us so we can tailor a particular plan that will work best for you.
With our tax software tools, we can readily model your tax situation for 2013 and run numerous “what-if” scenarios. That allows us to quantify the benefits of your tax planning options and empower you to make better tax planning decisions. Call us today to schedule your mid-year assessment!