The Effect of the American Tax Relief Act of 2012 on your taxes
About the Author, Barry Newman: They say that only two things are universal—death and taxes. But each act is unique. For millions of Americans their unique situations regarding employment, owning their own business, working teens and more require more than software from a box. Working with a certified public accountant like Barry Newman offers personalized service to meet each client’s needs. Newman is a partner of Lehman Newman Flynn and Vollaro CPA’s in New York City and is a member of the American Institute, New York Society, and the National Conference of Certified Public Accountants.
With the recent passage of the new tax act, the first thing on many taxpayers’ minds is “how is this going to affect my tax returns that I will be filing between now and April 15th”. The new tax act affects taxes for 2013, which are to be filed in 2014. The tax rules for 2012 have remained unchanged except for a few issues that were expected to change. Many of the changes for 2013 affect single taxpayers whose income is in excess of $400,000, heads of household in excess of $425,000, and $450,000 for joint filers. All those with income in excess of these amounts will see their top tax rate increase from 35% to 39.6%. All those with incomes below these amounts will see their tax rates remain the same as before.
One of the other major changes pertains to long term capital gains rates (for assets held more than 1 year when sold). The top tax rate increases from 15 to 20% for those taxpayers with income in excess of the amounts discussed above. All other taxpayers will still only pay the 15% rate that was in effect before. These same rules apply to Qualified Dividend Income, which includes most of the dividends earned.
There is a Medicare surtax of 3.8% on Investment Income when total income exceeds $200,000 for unmarried taxpayers and $250,000 for married taxpayers filing jointly. The tax is on the lesser of the investment income or the total income in excess of the thresholds mentioned here. Investment income includes interest, dividends and capital gains. For wages that exceed these same amounts, there is an additional .9% Medicare surtax charged to employees.
The American Opportunity Credit, for Qualified College Tuition expenses, was schedule to expire after 2012, and has now been extended to 2017. This credit, within certain income limitations, allows many middle class families to take a $2,500 credit against their taxes (dollar for dollar offset). And depending on the circumstances, 40% of the credit (up to $1,000) may be refundable even if there is no tax liability at all.
For those people who have started taking minimum required distributions (MRDs) from their IRAs (at age 70½), $100,000 of the MRD could be directly rolled over to a charity, resulting in no tax. The advantage was to avoid income limitations of charitable deductions, which is 50% of income. For example, if the taxpayer’s only income is the $100,000 MRD, they would be limited to only a $50,000 charitable deduction, with tax due on the remaining $50,000. This provision expired with the 2011 tax returns. The new tax act retroactively extends this provision through 2013, and for those people that took a cash distribution from their IRAs in 2012, they have until January 31, 2013 to roll the cash over to a charity and avoid paying tax on the 2012 MRD. This is significant, as there are only a few days left to do this.
These are just a few of the many provisions of the American Tax Relief Act of 2012. Each taxpayer’s situation is different, so more than ever a qualified tax professional should be involved in your tax preparation and planning. Without proper guidance, some benefits may be overlooked, with a loss of significant tax savings.