Some Highlights on the American Taxpayer Relief Act of 2012

Tax season is just around the corner.  Are you familiar with some of the changes in the American Taxpayer Relief Act of 2012 which may have an impact on your personal taxes?  Here is a quick list of some changes with which you should be familiar:

– The tax rates for ordinary income range between 10% and 39.6% as do short term capital gain rates.

– Long term capital gain rates range from 0% to 20% depending upon income and filing status as do qualified dividend rates.

– The new Net Investment Income Tax (NIIT) can add 3.8% tax to your tax liability.

All of the above rates are dependent upon income and filing status.  Gone are the simpler calculations and hello to new, more complex calculations.  This is the time, if you don’t already, to either use software to prepare your taxes or have someone prepare them for you.  Say goodbye to preparing taxes manually.

The battle of the tax rates of individual U.S. Corporate rates changes for 2013 with the corporate tax rate being lower than the rates of individuals.  If you are a business owner, you should consult your tax professional to ensure your business is strategically to minimize taxes as the highest corporate rate is 35% compared to the highest rate for individuals of 39.6% (plus perhaps the NIIT of 3.8%).

If you are a business owner (even a small business owner), you should analyze the best use of deductions and/or losses.  Certain deductions and/or losses may provide more tax relief based on the type of organization and the nature of the deduction or loss.

The Act has raised the floor for deduction of medical expenses from 7.5% to 10% of adjusted gross income.  Some taxpayers may be affected by the phaseout of total itemized deductions.  Based upon adjusted gross income and the filing status, a threshold may be imposed to determine the deductibility of deductions.

If an unmarried taxpayer’s adjusted gross income is in excess of $250,000 or a married taxpayer filing jointly is in excess of $300,000, the taxpayer(s) could encounter a phaseout of personal and dependent exemptions, i.e., 2% of every $2,500.00 of adjusted gross income above the foregoing amounts.  The exemption amount of $3,900.00 per person could be reduced based on the overall adjusted gross income.

While everything thus far leads one to see higher taxes, possible reduced deductions, there is a ray of sunshine.  If a long-term asset is donated to charity, the long-term capital gain is tax exempt as well.  The market value of the asset at the time of donation is the taxpayer’s basis, and thus, is not subject to capital gains tax.

Finally, the exemption for AMT (Alternative Minimum Tax) has been increased to $51,900 for unmarried taxpayers and to $80,750 for married filing joint returns.  While the tax rate remains at 26%, the increase in exemption amounts can be significant if a taxpayer is subject to AMT.

This article is intended to provide some highlights of how your 2013 income taxes can be impacted.  It is suggested that you contact your tax preparer to discuss any tax saving.  Strategies which may be available to you if you act before December 31, 2013.  January 1, 2014 may be too late to reduce tax liability.

This article was written by Kay M. Sowa. Ms. Sowa is a member of the Trusts and Estates Group at Capehart & Scatchard, P.A.  She is an IRS Enrolled Agent as well as a Certified Trust and Financial Advisor.  She oversees the trust and estate administration practice for the firm.  She is an accomplished author and lecturer who has frequently spoken on behalf of a number of organizations including the National Business Institute and the Institute of Paralegal Education. Should you have any questions or would like more information, please contact Kay at 856.914.2040 or by e-mail at ksowa@capehart.com.

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