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American Taxpayer Relief Act of 2012
On January 2, 2013, the President signed the last-minute legislation into law to avoid certain provisions of the "fiscal cliff". While not addressing any spending provisions, the Act covered a number of significant tax items both for 2012 and 2013. A summary of the key provisions is as follows:
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All the individual marginal tax rates are retained (10%, 15%, 25%, 28%, 33%, and 35%). However, a new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).
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The personal exemptions and itemized deductions phase out is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.
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A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold (i.e., $450,000 for joint filers); the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.
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The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers.
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The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act.
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The act also extended through 2013 a number of temporary individual tax provisions, most of which expired at the end of 2011. Some of which are:
Deduction for certain expenses of elementary and secondary school teachers;
Exclusion from gross income of discharge of qualified principal residence indebtedness;
Mortgage insurance premiums treated as qualified residence interest;
Deduction of state and local general sales taxes;
Above-the-line deduction for qualified tuition and related expenses; and
Tax-free distributions from IRAs for charitable purposes for those 70 1/2 and older, not to exceed $100,000
See the following entry below for additional tax increase provisions of the Act.
2013 Tax effects of the Patient Protection and Affordable Care Act
On June 28, 2012, the Supreme Court upheld the individual mandate of "Obamacare" requiring citizens to carry health insurance or pay a penalty, beginning in 2014. This mandate is upheld as a "tax" that will be collected by the IRS, assumed to be part of the 1040 return. This tax will be the greater of $95 or 1% of an individual's income. While this and the many provisions regarding access to health insurance policies will roll out in the near future, we want to make you aware of the tax effects of the law that come into effect on January 1, 2013.
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An additional 0.9% hospital insurance (HI) tax on wages and self-employed income in excess of $250,000 for joint returns, and $200,000 for single taxpayers.
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A 3.8% surtax on higher income taxpayers which is the lesser of 1) "net investment income" (interest, dividends, annuities, royalties, rents, and capital gains), or 2) the excess of modified AGI over $250,000 (joint) / $200,000 (single).
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The medical expense limitation on Schedule A for itemized deductions increases from 7.5% to 10%.
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Reimbursements under a qualified FSA plan will be limited to $2,500/year.
Therefore for taxpayers above the $250,000 / $200,000 income limits, it may make sense to accelerate income into 2012 or defer deductions until 2013 to minimize taxes. For example, if a large bonus, capital gain transaction, or amount of interest is to be paid toward the end of 2012 or the first part of 2013, moving the transaction into 2012 could save as much as 4.7% in tax. This is separate from any increased taxes that may result from the planned expiration of the "Bush cuts", also at the end of 2012.
If you have concerns about the potential tax impact, please contact our office and we can discuss your personal situation.
MBT Repeal
On May 25, 2011, Michigan Governor Rick Snyder signed into law a series of bills enacting a Michigan corporation income tax (CIT), eliminating the Michigan Business Tax (MBT) except in limited situations, and making significant changes to the individual income tax provisions.
Highlights of the bills that affect business taxes.
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The MBT is repealed for years beginning on or after January 1, 2012, unless the taxpayer elects to continue to file under the MBT provisions.
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A 6% income tax will be levied on C Corporations, very similar to the income tax portion of the MBT.
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S Corporations, LLCs, partnerships and individuals with business activities will not be subject to the Business Tax. Shareholders, partners, members and sole proprietors/rental property owners would pay only the individual income tax on business income.
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Unitary filing, nexus and sales-based apportionment provisions of the MBT are retained, but applied only to C Corporations.
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The only credit allowed under the Corporate Income Tax (CIT) is the Small Business Alternate Tax Credit.
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Businesses with fiscal years will file MBT returns through December 31, 2011, and, if applicable, Corporate Income Tax (CIT) for the remainder of their fiscal year after January 1, 2012.
Highlights of the bills that affect individual taxes.
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The individual tax rate will be 4.35% for 2012 and drop to 4.25% thereafter.
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The standard personal exemption is fixed at $3,700 for 2012 and will be adjusted for inflation thereafter.
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Personal exemptions are phased out for single taxpayers with "household resources" (essentially household income without deduction for net business, rental or royalty losses) between $75,000 and $100,000, and married joint taxpayers between $150,000 and $200,000.
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The additional $600 exemption for children under age 19 is eliminated.
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The additional exemption for taxpayers over age 65 is eliminated.
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The city income tax credit and the credits for contributions to public entities, community foundations and homeless shelters/food banks are eliminated.
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The Michigan Earned Income Credit is reduced from 20% of the Federal EITC to 6% of the Federal EITC.
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Homestead property tax credits will be phased out beginning at $41,000 of "household resources" (essentially household income without deduction for net business, rental or royalty losses).
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Taxpayers are ineligible for the Homestead Property Tax Credit if the taxable value of their homestead is greater than $135,000.
Pensions and Social Security
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Taxpayers born before 1946 will have no change in the treatment of their pension income. Social security and public sector pensions are fully exempt; private sector pensions are exempt up to $45,120 for single taxpayers and $90,240 for joint filers. Note that the birth date threshold is based on the eldest of a couple filing married joint, not on the birth date of each taxpayer.
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For taxpayers born between 1946 and 1952, federally taxable Social Security benefits will be exempt, but the exemption for public and private sector pensions will be limited the lesser of the pension income or $20,000 for a single filer and $40,000 for joint filers. However, the exemption is eliminated if "household resources" exceed $75,000 for a single filer and $150,000 for a joint filer. Once the taxpayer reaches age 67, the exemption is set at $20,000 and $40,000, which can offset non-pension income if pension income is less than the exemption amount.
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For taxpayers born after 1952, federally taxable Social Security benefits will be exempt, however all pension income is taxable until age 67. After reaching at 67, the exemption is limited to $20,000 for single filers, $40,000 for joint filers against all income including federally taxable Social Security. If federally taxable Social Security benefits exceed the exemption amount, the taxpayer can exempt all of the Social Security benefits. The exemption is eliminated if household resources exceed $75,000 for a single filer and $150,000 for a joint filer.
In summary, this means only one level of tax for S-Corporations, LLCs/Partnerships, and sole proprietors who were paying MBT. However it will also result in higher Michgian taxes for a significant number of individuals. If you are concerned or have questions about how this will affect your tax situation in 2012 and beyond, please call our office. We can help you with strategies to minimize any potential increases in tax.
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