Travis H. Long, CPA, Inc. Blog

Originally published in the Cedar Street Times

January 11, 2013

The American Taxpayer Relief Act of 2012 was signed into law January 2, 2013.  There was lots in the bill, but I am going to hit on a few that are notable and others that having meaning to a lot of people.  I think making the Alternative Minimum Tax patch permanent and indexed for inflation was a huge victory for many taxpayers.  That patch has been kicked down the road for years.  The indexing will certainly alleviate concerns of a similar problem down the road.  Many middle class people do not realize they were on the cusp of paying thousands of dollars more on their 2012 tax returns due in April without this fix.

The estate tax exemption being set permanently at $5 million and also indexed for inflation is huge, especially for Californians that own property.  In a lot of ways, this simplifies estate planning for most individuals and will bring into question the need of the typical A-B split for many people that currently have it.  Having a B trust, or bypass trust, would require additional tax work in the future, so the ability to eliminate it, could be worth the cost of amending your trust.  Family dynamics may of course still dictate a B trust is prudent.

Various other temporary provisions we have been enjoying that were made permanent included marriage penalty relief for joint filers, better rules for student loan interest deductions and dependent care credit rules.

Quite a few things were extended but not made permanent.  A big one was extending the exclusion from income of cancelled debt on personal residences for another year.  This could be a lifesaver for those still struggling with mortgages that are “underwater.”  Deductions for grade school teacher expenses and an above-the-line deduction for qualified tuition and related expenses were other items extended through 2013.  More important than the deduction for tuition was the extension of the American opportunity tax credit through 2018 which saves taxpayers up to $2,500 each year as a result of education costs.  Enhanced provisions of the child tax credit were also extended through 2018.

Small businesses have had the luxury of writing off high dollar amounts of many capital asset purchases through code section 179.  This was slated to return to $25,000, but has been extended through 2013 at $500,000.  Bonus depreciation and accelerated expensing of qualified leasehold, restaurant and retail improvements on a 15 year schedule instead of returning to a 39.5 year schedule was also extended.

Bush-era tax rates and capital gains rates have been retained for everyone but the wealthy.  For people making over $400,000, their marginal bracket rose from 35% to 39.6%, and their capital gains tax went from 15% to 20%.  There is also a new 3.8% medicare tax on investment income for people generally making over $200,000 and a new hospital insurance tax of .9% for people generally making over $200,000.  Itemized deduction phaseouts have also returned for high income earners.

Everyday wage earners will be negatively impacted by the return of a 6.2% tax for Social Security rather than 4.2% tax we have had for the past two years, as they will see two percent less in their paychecks as a result.  Another negative impact for people with high uninsured medical expenses, is that the threshold for medical itemized deductions has moved from 7.5% of your adjusted gross income to 10%.  Individuals 65 and up will still enjoy the 7.5% rate for another three years.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.