Congress has given us a new
tax bill – the American Taxpayer Relief Act of 2012. It was passed by the
Senate at approximately 2 a.m. on January 1 and ….. Actually, that fact alone tells
you about the quality of this tax bill.
Let’s take a look at some
individual tax measures.
(1)
The 2% social
security tax reduction is gone. Everybody with a paycheck will immediately see
their take-home pay go down.
(2)
The previous tax
rates of 10/15/25/28/33/35 percent still exist, but ….
a.
There is a new 39.6% tax rate.
NOTE: The new rate starts at $400,000 for singles and
$450,000 for marrieds.
(3)
The qualified
dividends and capital gains rates do not change UNLESS…
a.
… you make more
than $400,000 for singles and $450,000 for marrieds.
b.
If this is you,
your NEW qualified dividends and capital gains tax rate will be 20%.
OBSERVATION:
Let’s be fair: 20% is not a bad tax
rate.
You may have noticed that the
above three changes pivot on $400,000/$450,000.
QUESTION:
Can we rely on this throughout the new law?
ANSWER:
Silly you. Of course not.
(4)
Phaseout of your
personal exemptions
Tax pros
call this the “PEP,” and it is the brilliant idea to reduce (if not eliminate)
your exemptions for yourself, your spouse, your kids and anyone else – once you
go past a certain income.
QUESTION:
What is that income level?
ANSWER:
$250,000 for singles and $300,000 for marrieds.
(5)
Phaseout of your
itemized deductions
You
have the same reasoning as (4), but this time we are talking about reducing
your itemized deductions. These are your mortgage, real estate taxes, contributions
and so on.
QUESTION:
What is that income level?
ANSWER: $250,000 for singles and $300,000 for
marrieds.
(6)
Alternative
Minimum tax
Congress
reset the exemption amounts to $50,600 for singles and $78,750 for marrieds –
about in line with 2011.
This
is good news because – if Congress did nothing – the exemption amounts were
scheduled to decrease drastically. This would have pulled millions more people
into the AMT, even with the same income as 2011 and would have made for some
stressful client conversations.
Congress
has also linked the AMT exemption and phaseout levels to an inflation factor.
Finally and thank goodness.
Frankly, in my opinion the AMT may be the most important thing Congress did with
individual taxes in this legislation.
(7)
Coverdell IRAs
a.
Remain at $2,000
rather than reverting to $500
b.
As an FYI, these
are the “education” IRAs
(8)
Employer provided
education
a.
The exclusion
from income is renewed at $5,250.
NOTE:
This will make a Tax Guy’s wife happy as she returns for her Master’s.
(9)
Student loan
interest
a.
Remains deductible
up to $2,500
(10) The American
Opportunity tax credit
a.
Is renewed up to
$2,500
NOTE: Good news for a Tax Guy with a daughter in
college
(11)
The $250 supplies
deduction for elementary and secondary school teachers
a.
Is renewed
(12)
Mortgage debt exclusion
from income
a.
Up to $2 million
is renewed but for 2013 ONLY
(13)
The sales tax
deduction in lieu of income tax deduction
a.
Is renewed
b.
Good news if you
live in Florida, which does not have an income tax
(14)
Above-the-line
deduction for higher education
a.
Up to $4,000 – if
you can meet the income limits
(15)
Child credit
a.
Stays at $1,000 per
child rather than dropping to $500
Let’s
go back a moment to the 39.6% tax rate (income of $400,000/450,000) and the
PEP/Pease (income of $250,000/300,000). In
addition to this spaghetti, there are two NEW taxes in 2013. They are NOT in
this bill because they already existed and were waiting to hatch, like
something in the movie Aliens. They are ADDITIONAL taxes on top of the above. They
are:
(1)
If your income
goes above $200,000 for singles and $250,000 for marrieds, there will be a new
3.8% tax rate on your interest, dividends, capital gains and investment income of that type.
This was courtesy of ObamaCare.
(2)
If your income
goes above $200,000 for singles and $250,000 for marrieds, there will be a new
0.9% tax on your salary for additional Medicare. This too is courtesy of ObamaCare.
Did
you see what Congress did here? Look at the income thresholds on some of
these taxes:
$200,000/$250,000
$250,000/$300,000
$400,000/$450,000
Try
remembering all that and doing the math in your head whenever you get a
client phone call.
Notice
what the “true” top federal tax rate is: 39.6% plus 3.8% plus 0.9% plus 1.2%
(approximate PEP/Pease effect) equaling 45.5%. This is Congress' thing now: sneaking taxes on you through the back door.
We will go over the business tax provisions with another blog.
