American Taxpayer Relief Act of 2012

Many of the changes included in the 2012 American Taxpayer Relief Act, which was passed January 1, 2013, take effect January 1, 2013. Here are the major parts of that law which affect tax year 2013:

  • The employee portion of Social Security Tax will return to its pre-2011 level of 6.2%. Therefore as of January 1, 2013 all employees will see less net pay in their paychecks.
  • Permanently sets the top marginal tax rate at 39.6% and increases the top rate on capital gains and qualified dividends to 20% after 2012 for single taxpayers with income over $400,000 and married taxpayers with income over $450,000.
  • Permanently reinstates the personal exemption phase-out and limitation on itemized deductions for single taxpayers with adjusted gross income over $250,000 and joint filers with AGI over $300,000; thresholds will be indexed annual for inflation after 2013.
  • Permanently increased the top estate tax rate at 40% for estates worth more than $5.25 million, which will be indexed for inflation after 2013.
  • Permanently retained the child-tax credit (set at $1,000 for TY 2013).
  • Increased the dependent care tax credit to 35% and increased eligible expenses to $3000 for one child
  • American Opportunity Credit has been extended through 2017.
  • The Earned Income Tax Credit for larger families has been extended through 2017.
  • Marriage penalty relief for the standard deduction was extended.
  • Coverdell education savings account contribution increased from $500 to $2000 and expanded to include expenses for elementary and secondary school education.
  • Portability of Unused Estate Tax Exemption permanently extended, as long as a timely Estate Tax Return is filed
  • Gift and Estate Exemption Reunification permanently extended.
  • 50% Bonus First-Year Depreciation extended for qualified business property purchased in 2013.
  • Higher AMT exemptions have been reinstated and are now permanent with indexing.
  • Higher Section 179 depreciation limit of $500,000 has been continued through the end of 2013.
  • The Sales Tax Deduction as an option instead of State Income Tax Deduction continues through 2013.
  • Education Savings Accounts are now permanent.
  • Tuition deduction continues through 2013.
  • Educator Expense deduction continues through 2013.
  • Student Loan deduction is now permanent.
  • Energy Credits for energy-efficient home improvements (insulation, windows, etc.) continues through 2013.
  • Adoption Credit is now permanent.
  • IRA Transfers to charity in lieu of RMDs continues through 2013.
  • Exclusion for personal residence Cancellation of Debt income continues through 2013, but only for federal purposes, not for California.

    Patient Protection and Affordable Care Act of 2010

    In addition to this new 2012 American Taxpayer Relief Act, taxpayers will see other tax changes taking effect for 2013 as a result of the Patient Protection and Affordable Care Act of 2010 (also known as “Obamacare”):

  • An additional 0.9% Medicare Hospital Insurance tax on wages and self-employment income that exceeds $200,000 for single taxpayers; $250,000 for married taxpayers.
  • A 3.8% net investment income tax on certain types of investment income; it will apply to the lesser of the individual’s net investment income or modified adjusted gross income in excess of the $200,000 and $250,000 thresholds explained above. Estates and Trusts are included in this new tax.
  • Medical expense deduction threshold goes from 7.5% to 10% for taxpayers under 65; those 65 and older can continue to use the 7.5% threshold above AGI through 2016.
  • FSA contributions for medical expenses are now limited to $2,500 per year.
  • Children under age 27 may be insured under their parent’s health insurance policy, even though they are not a dependent on the tax return.

    Other Tax Law Changes

    Other tax law changes include the following:

  • Mileage rate for business miles is 56.5 cents; medical and moving miles is 24 cents; charity miles are 14 cents.
  • Personal exemption for 2013 is $3,900.
  • Earned Income Ceiling for Social Security Benefits before full retirement age is $15,120.
  • Legal same-sex marriages will be recognized for federal tax purposes, and will file “Married Filing Jointly”. This does not include Registered Domestic Partnerships.
  • IRA Contributions maximum has been increased to $5,500, plus $1,000 Catch-up IRA Contribuions
  • Real Estate Professionals are under increased scrutiny to be allowed to avoid passive loss limitation rules in deducting their own rental activities as part of their “trade or business”; the 500 hour material participation rule has come under intense audit pressure.
  • Annual Gift Tax Exclusion for 2013 will be $14,000.
  • Form 1099-K’s, which report credit card sales to a business, must be totaled and income must be reported beyond that total in order to avoid new 1099-K audits, which have begun. Businesses will need to do more careful recordkeeping to account for what part of credit card sales are for the sale, the sales tax, etc. in order to substantiate their totals.
  • Hobby Loss Audits are focusing on “side” businesses that are being challenged by the IRS as tax shelters and have made no profit in at least three of the past five years.
  • Regulations regarding businesses capitalizing versus expensing purchases of materials and supplies, as well as repairs and improvements, have changed. New rules about economic useful life apply, with safe harbor amounts of $500 for most small businesses.
  • Home Office Safe Harbor alternative new for 2013; number of square feet used as home office multiplied times $5.00; mortgage interest and property tax can still be deducted on Schedule A; election to use this method has to be made annually; can’t create business loss, but can carry forward to next year.
  • Self-employment tax goes up in 2013 from 13.3% to 15.3%.
  • Businesses calling workers Independent Contractors versus Employees and not paying those workers through payroll continues to be a major source of tax audit revenue; Voluntary Classification Settlement Program has been revised and is available to provide partial relief from tax penalties.
  • 2013 California Minimum Filing Requirement is $15,702 for single taxpayers, and $31,406 for Married and $21,002 for Head of Household taxpayers; 2013 Federal Minimum Filing Requirement is $10,000 for single taxpayers and $20,000 for Married, $12,850 for Head of Household.
  • Maximum individual tax rate for California is 12.3%, plus a Mental Health Services Tax of an additional 1% for taxable income over $1 Million.