February Newsletter

hile last year was a leap year, this year marks a leap into tax law changes with the passage of “fiscal cliff” legislation during the first week of January. This legislation, which effectively pushes a higher cliff down the road, has tax law changes that impact most of us. Included here is a recap of some of the major changes to last year’s taxes and those in the future. Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Final Touches on 2012 Taxes

In a last minute gesture, the tax laws that apply to 2012 were made final on January 1st, 2013. Whether you consider this incompetence or just simple lack of respect for the general population, one thing is clear. These late changes gave no time to plan your 2012 tax situation. Here are the major tax changes that were made retroactive to the beginning of 2012.

Circle $250 above the line out-of-pocket expense deduction for teacher’s classroom expenses
Circle The ability to deduct either general sales tax or state income tax as an itemized deduction.
Check Your 2013 Pay Stub
Circle The ability to treat mortgage insurance premiums the same as interest expense on your itemized deductions.
Circle Cancellation of income for certain home indebtedness forgiveness.
Circle The ability for those 70½ or older to make up to $100,000 in charitable contributions directly from qualified individual retirement accounts and exclude the contribution from income.
Circle Extension of Section 179 business expensing of up to $500,000 in qualified capital purchases
Circle Alternative Minimum Tax “patch”

What you need to know

1 Expect delays. Because of these late changes the IRS did not begin processing 2012 tax returns until January 30th. This delay has created a logjam for those who wish early refunds.
2 Expect more delays. If your tax return includes adoption expenses, depreciation, energy credits or any small business credits your return cannot be processed until late February or early March, 2013.
3 Don’t delay. Since the processing of tax returns may be delayed it is more important than ever to have your materials ready to go as soon as possible. Waiting until a tax return can be processed will make it difficult to prepare and process all the tax returns on time. It is best to have your tax return ready to go when processing windows are opened.

The Dust Settles on 2013 Taxes

With the passage of the American Taxpayer Relief Act of 2012 the proverbial “fiscal cliff” was officially moved down the road.

While annual deficits still loom large and a higher “cliff” will need to be navigated in the future, at least there is now some clarity for each of us in 2013.

Here are some
of the major provisions:

The AMT Patch Might Not Get a Patch Job
Check You’re now living with less take-home pay. Your social security tax rate went back to 6.2% in 2013. An extension of the lower 4.2% rate in 2011 and 2012 was not added to the recently passed legislation. So if you have not done so, please review your household budget to adjust for the lower take-home pay.
Check Income tax rates now have certainty. The tax rates will remain unchanged for 2013 if your taxable income is below $400,000 unmarried, $425,000 head of household and $450,000 married filing joint. Taxable income above these levels will have their income taxed at 39.6% versus 35% (a 13.1% tax increase). Approximately ½ of the impacted tax returns will be small businesses. If this could impact you, now is the time to plan accordingly.
Check Maximum Dividend and Long-term Capital Gain tax rate goes to 20%. The tax rates on ordinary dividends and long-term capital gains remain unchanged for 2013 (0% if you are in the 10 or 15% income tax bracket; 15% for everyone else) if your income is below $400,000 single, $450,000 married filing joint. For those with incomes above these amounts, the rate goes to 20% (a 33.3% increase). Tax planning to match investment losses against gains will become more important in 2013.
Check Itemizing Medical Deductions is now harder to do. Unless you are 65 or older, you may not itemize your out-of-pocket medical expenses until they exceed 10% of your adjusted gross income. This is an increase from 7.5% in 2012. Consider loading appropriate medical, dental and eye care expenses into one year if it will help you pass the threshold.
Check Phase-outs are back! Your personal exemptions and your itemized deductions can once again be phased out in 2013. This tax increase will impact you if your income exceeds $250,000 single or $300,000 married filing joint. You could lose all your personal exemptions and up to 80% of your itemized deductions. Please recall a form of these phase-outs was common practice in 2009.
Check More upper income tax increases. In addition to the tax increases for upper-income taxpayers on income tax rates (35% to 39.6%), capital gains/dividend tax rates (15% to 20%), itemized deduction phase-out, and personal exemption phase-out there are new Medicare surtaxes in 2013. If your income is $200,000 single or $250,000 married, any additional income will be subject to an additional .9% Medicare surtax. If your income exceeds these levels you could be subject to a 3.8% Medicare surtax on your investment earnings.

While a major piece of tax legislation was passed on the first day of January 2013, don’t expect it will be the last. Congress and the President will be continuing the debate over our massive annual spending deficit and the national debt. Because of this, more tax changes could occur in the near future.

As part of the legislation passed in the wee hours of January 1st, 2013 is some permanency to the Estate and Gift Tax laws. Effective in 2013 and beyond:

Maximum Estate and Gift Tax rate: 40%
(up from 35%)
Inflation adjusted estate exclusion: $5,250,000
in 2013

Other Observations:

Check Portability of an unused estate exclusion to a spouse is made permanent.
Time to be thinking about health insurance
Check There is an allowed deduction to account for estate taxes paid to a state.
Check If this law was not passed; estates over $1 million were subject to an estate tax with a maximum tax rate of 55%.

So while you still can’t take it with you, at least the federal government will let your survivors take more of it with them.

Key 2013 Tax Information

Item 2013 2012 Change
Maximum income tax rate 39.6% 35.0% +4.5%
Maximum Medicare tax rate 2.35% 1.45% +0.9%
Social Security employee rate 6.2% 4.2% +2.0%
Max Dividend/Capital Gain rate 20% 15% +5.0%
Personal Exemption $3,900 $3,800 +$100
Standard Deductions
Single $6,100 $5,950 +$150
Joint or Qualifying Widow 12,200 11,900 +$300
Head of Household 8,950 8,700 +$250
Married Filing Separate 6,100 5,950 +$150
Elderly/Blind: Married Add $1,200 Add $1,150 +$50
Elderly/Blind: Unmarried Add $1,500 Add $1,450 +$50
Key Credits
Child Tax Credit $1,000 $1,000
Adoption Credit $12,970 $12,650 +$320
Lifetime Learning Credit $2,000 $2,000
American Opportunity Credit $2,500 $2,500
Savers Credit $1,000 $1,000
Retirement Plan Contributions
Traditional IRA $5,500 $5,000 +$500
(age 50+ catchup) Add $1,000 Add $1,000
Roth IRA $5,500 $5,000 +$500
(age 50+ catchup) Add $1,000 Add $1,000
401(k), 403(b), 457 & SARSEP 17,500 17,000 +$500
(age 50+ catchup) Add $5,500 Add $5,500
SIMPLE IRA $12,000 $11,500 +$500
(age 50+ catchup) Add $2,500 Add $2,500
Mileage Rates
Business 56.5¢/mile 55.5¢/mile +1¢
Medical/Moving 24.0¢/mile 23.0¢/mile +1¢
Charitable 14.0¢/mile 14.0¢/mile
Section 179 $500,000 $500,000
Property limit $2 million $2 million
Other Information
Tuition and Fees Deduction $2,000 $2,000
Medical Itemized Deduction AGI Threshold
(7.5% in 2013 for 65 and older)
10.0% 7.5% +2.5%

As always, should you have any questions or concerns regarding your situation please feel free to call.

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