By Nick Hopkins, CPA, CFP
Director, Tax Services
After months of wrangling and posturing, Congress has finally passed a deal on the “Fiscal Cliff” that will have numerous effects on the tax code. The Senate by a vote of 89 to 8 approved H.R. 8, “The American Taxpayer Relief Act,” and The House of Representatives followed suit and passed the bill 257 to 167. The bill is now moving to President Obama, who is expected to sign it into law.
So how will the new federal tax landscape affect your business or personal income? Here is a rundown of the key tax provisions contained in the law:
- Income Tax Rates – The income tax rate goes up from 35% to 39.6% for individuals making more than $400,000 a year and joint filers earning more than $450,000 a year.
- Dividends & Capital Gains Rates – Taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families will increase from 15 percent to 20 percent.
- Alternative Minimum Tax – The law permanently addresses the alternative minimum tax and indexes it for inflation to prevent nearly 30 million middle- and upper-middle-income taxpayers from being hit with higher tax bills.
- Estate & Gift Tax – For estate, gift, and generation-skipping transfer (GST) tax purposes, affecting individuals passing and gifts made after 2012, there is a $5 million exemption (adjusted for inflation); and the top estate, gift and GST rate is permanently increased from 35% to 40%.
- Payroll Taxes– The 2% point reduction in payroll taxes for Old Age, Survivors and Disability Insurance (OASDI) tax – commonly known as the Social Security tax – will be allowed to expire, meaning most wage earners will see a smaller paycheck.
- Personal Exemption Phaseout – The Personal Exemption Phaseout (PEP), which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and $250,000 for single filers. Under the phaseout, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold.
- Itemized Deduction Phaseout – The “Pease” limitation on deductions, which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and $250,000 for single filers. Thus, for taxpayers subject to the “Pease” limitation, the total amount of their itemized deductions is reduced by 3% of the amount by which the taxpayer’s AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions.
- Business Tax Credits & Deductions – Tax credits for businesses, including the Code Sec. 41 research credit and the Code Sec. 199 domestic production activities deduction, are generally extended through the end of 2013.
- Section 179 Expense – The Section 179 deduction, which provides for immediate expensing of qualifying assets, was scheduled for a significant drop in 2012 and beyond. The provision allowed for the immediate write-off of up to $500,000 in assets in 2011, but only $139,000 in 2012 and $25,000 in 2013. The fiscal cliff deal has changed that, increasing the limit back to $500,000 for 2012 and 2013.
- Bonus Depreciation – The Act has extended the 50% bonus depreciation provisions for property placed into service during 2013.
- Other Tax Changes – A number of individual tax provisions have been retroactively extended through 2013. In addition, there is a five-year extension of credits that were enhanced as part of the stimulus, including the college tuition credit, the earned income tax credit and the child tax credit.
If you need a customized assessment of how the new tax picture will affect your bottom line, please call Nick Hopkins in our Tax Services department at (317) 608-6695 or email [email protected].