Important Tax Law Changes for 2012 & 2013

There will be a number of significant tax law changes for 2012 and 2013 IF Congress does not act to extend certain provisions. We’d like to bring a few specific changes to your attention. If any of these changes may affect your personal situation, please contact us for assistance in planning for the second half of 2012 and tax year 2013.

Here is what will change for 2012:

1. AMT (Alternative Minimum Tax Patch) – Congress had temporarily raised the exemption levels for taxpayers to allow for inflation adjustments. These levels will expire and be replaced by lower levels for 2012. What this means is that more taxpayers will find themselves paying the AMT this year if Congress does not continue this patch.

2. Tuition & Fees Deduction – Taxpayers are currently allowed a deduction from gross income of up to $4,000 for college tuition and fees. This deduction will be eliminated altogether.

3. Section 179 Expense – Business owners are allowed to fully expense up to $139,000 for new equipment during the 2012 tax year. This is down from $500,000 for the prior year. For 2013, this will drop to only $25,000.

4. Bonus depreciation – In addition to the Section 179 expense, business owners have enjoyed a 100% deduction on their business income taxes in bonus depreciation. This drops to 50% for 2012.

Here is what will change for 2013:

1. Tax Brackets – The income tax brackets will rise beginning January 1, 2013. They are currently at 10%, 15%, 25%, 28%, 33% and 35%. They will increase to 15%, 28%, 31%, 36% and 39.6%.

2. Marriage Penalty – Instead of paying double the amount of income taxes that a single person would pay, married taxpayers who file joint have enjoyed a 33% discount. This will change back to double for 2013.

3. Estate Tax – Historically, estate tax rates have been dropping since 2009. Exemptions, or the amount that is not taxed at all, have been rising to benefit taxpayers. However, that is set for a big change in 2013 when estate tax rates rise from 35% to 55%. The exemption, which is over $5 million in 2012, will drop to just $1 million. That means everything over $1 million will be taxed at the new estate tax rate of 55%.

4. Capital Gains – Taxpayers in the 10% and 15% bracket were taxed at a 0% rate for 2012, however, that will increase to 15% next year. Capital gain tax has been 15% for some time for higher tax brackets, however, that rate will expire and increase to 20%.

5. Short Sales & Foreclosures – Homeowners who lost their residences to foreclosure or short sale have not been subject to income tax on the amount of debt that was cancelled thanks to a special exemption. This exemption will end as of December 31, 2012.

6. Dividends – Tax rates for dividends have been at 15% for the last few years but will begin to be taxed at the regular income tax rates starting in 2013.

7. Payroll Taxes – Remember that Congress extended the 2% cut on the amount that individuals pay in social security taxes through the end of this year. This provision expires on December 31, 2012 and means you net paycheck will go down by 2%.

8. Health Insurance Tax – Under the current law, your wages are subject to a 2.9% Medicare payroll tax regardless of your salary level. Under the new law, there will be an additional .9% in Health Insurance Tax applied to wages in excess of $250,000 for married filing joint, $125,000 for single filers and $200,000 for all others.

9. Investment Income – Also under the new Health Insurance Tax, investment income will be taxed at 3.8%. The threshold amounts are the same as for earned income – $250,000 for married filing joint, $125,000 for single filers and $200,000 for all others.

10. Medical Expenses – Currently, taxpayers can take an itemized deduction for medical expenses that are more than 7.5% of their adjusted gross income. The new law raises that floor to 10%.

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