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Now We Know What The Rules Are | Tax Tip of the Week | No. 183 January 30, 2013

Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a comment

Highlights of the Individual Tax Provisions in the New Taxpayer Relief Act

After months of senseless haggling, the Senate, early in the morning of Jan. 1, 2013, by a vote of 89–8, and the House of Representatives, late in the evening of Jan. 1, by a vote of 257–167, passed the American Taxpayer Relief Act of 2012, P.L. 112-240 (the Act). On Jan. 2, President Barack Obama signed the act into law, thereby avoiding the “fiscal cliff.” What was left on the table after the deal, which will set up another prolonged battle that will reinforce the divisiveness that has plagued Congress, are spending cuts, the budget, and the debt ceiling, not to mention basic tax reform.

General provisions

The most significant provisions of the Act made the Bush tax cuts permanent for married taxpayers filing jointly and surviving spouses with taxable incomes up to $450,000, for taxpayers filing single with taxable incomes of up to $400,000, and for taxpayers filing as heads of households with taxable incomes up to $425,000. The Act imposed a 39.6% rate on taxable income above those thresholds; extended the 15% rate on dividends and long-term capital gains for taxpayers under those threshold levels; and imposed a 20% rate on long-term capital gains and qualified dividends for taxpayers to the extent their income is above those thresholds.

The Act returned the personal exemption phase-out and a limitation on itemized deductions that had been repealed when the Bush tax cuts were enacted, and permanently indexed the AMT individual exemption amounts for inflation. Furthermore, the Act extended a variety of previously extended temporary tax provisions set to expire, commonly referred to as “tax extenders,” which affect individuals, businesses, charitable giving, energy, community development, and disaster relief.

The Act also made permanent a top estate tax rate of 40% and an estate tax exclusion of $5 million (indexed for inflation) for estates of decedents dying after Dec. 31, 2012. The $5 million estate tax exclusion was coordinated with the gift tax and the generation-skipping transfer tax so that the same $5 million exclusion applies to all three taxes.

Most disappointingly, Congress allowed the 2% payroll tax cut to expire at the end of 2012, resulting in a tax increase to about 114 million taxpayers, especially middle-class and lower-income taxpayers who have more of their income subject to the payroll tax.

Individual income tax rates

In addition to the rate changes and income thresholds discussed above, all of the tax brackets and the threshold amounts are to be adjusted for inflation after 2013 based upon the standard formula, not the chained formula that considers changes in consumer buying habits as a result of increased prices, which would result in lower increases.

In addition, starting in 2013, the 0.9% Medicare surtax applies to wage income greater than $200,000 for single taxpayers filing individual returns and $250,000 for married taxpayers filing joint returns. This tax was enacted in 2010 as part of health care reform (Patient Protection and Affordable Care Act, P.L. 111-148, as amended by the Health Care and Education Reconciliation Act of 2010, P.L. 111-152 (the health care acts).

Capital gains/dividend tax rates

To the extent that a taxpayer’s taxable income exceeds the threshold amounts for the 39.6% tax rate, long-term capital gains and qualified dividends will be subject to a 20% rate, an increase from the Bush-era maximum rate of 15%. Capital gains and qualified dividends that would be subject to the 25% through 35% rates if they were ordinary income will continue to be subject to a 15% capital gains rate. A 0% rate will continue to apply to capital gains and qualified dividends that would be taxed at the 15% rate if they were ordinary income. For 2013, ordinary income below $72,500 for joint filers and $36,250 for single filers will be taxed at the 15% rate.

Under another provision from the health care acts that was not affected by the latest legislation,  which applies starting in 2013, taxpayers filing single returns whose adjusted gross income (AGI) exceeds $200,000 and married taxpayers filing joint returns whose AGI exceeds $250,000 are subject to an additional 3.8% tax on net investment income.

Alternative minimum tax relief

Ending the yearly drama of enacting an alternative minimum tax (AMT) patch, the Act patches the AMT for 2012 and subsequent years by increasing the exemption amount subject to an annual inflation adjustment and allowing nonrefundable personal credits to offset in full regular taxes and AMT. For 2012, the Act increased the exemption amount to $50,600 from $33,750 for taxpayers filing individual returns and to $78,750 from $45,000 for married taxpayers filing joint returns. For 2013, the inflation-adjusted amounts are $51,900 for single taxpayers and $80,800 for married taxpayers filing joint returns.

The continued existence of the AMT is uncertain if Congress tackles comprehensive tax reform. In addition, President Obama has proposed replacing the AMT with the so-called Buffett Rule, under which taxpayers making more than $1 million would pay an effective rate of 30%.

Itemized deduction limitation

The Act has reinstated the Pease limitation (named after the congressman who sponsored the original provision) to reduce itemized deductions for taxpayers who meet certain thresholds by 3% of the amount by which the taxpayer’s AGI exceeds the thresholds.  The threshold amount is $250,000 for single taxpayers and $300,000 for married taxpayers filing joint returns. These thresholds are subject to adjustment for inflation for tax years after 2013. Under the Pease limitation, the amount of itemized deductions cannot be reduced by more than 80%.

Personal exemption phase-out

The phase-out of personal exemptions for taxpayers whose income is above certain threshold amounts was repealed for 2010, and the repeal was extended through 2012. The Act reinstates the phase-out of personal exemptions for taxpayers whose AGI exceeds the threshold amounts applicable to the Pease limitation. Under the Act, the total amount of exemptions that may be claimed by a taxpayer is reduced by 2% for each $2,500 by which the taxpayer’s AGI exceeds the applicable threshold amount, e.g., $250,000 for single taxpayers and $300,000 for married taxpayers filing joint returns.

Marriage penalty relief

The Act extended all marriage penalty relief. It kept the standard deduction for married taxpayers filing joint returns at twice the standard deduction for taxpayers filing individual returns, rather than allowing it to fall to 167% of the standard deduction for taxpayers filing individual returns. It also kept the 15% bracket for married taxpayers filing joint returns at 200% of the corresponding tax bracket for taxpayers filing individual returns. However, in the other areas of the Act dealing with threshold levels, Congress made no effort to extend marriage penalty relief.

Miscellaneous

The Act extends for five years certain tax breaks for low- and middle-income taxpayers, such as the earned income tax credit, the child tax credit, and the American opportunity tax credit. In addition, the Act extends through 2013 the deduction of up to $250 for certain expenses incurred by elementary and secondary school teachers; the exclusion from income for discharge of qualified principal residence indebtedness; the treatment of mortgage insurance premiums as qualified residence interest; the option to deduct state and local general sales taxes; the above-the-line deduction for qualified tuition and related expenses; and the exemption for 100% of the gain on sales of certain small business stock.  

As always, give us a call with any questions or concerns you may have. 

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

What We Know Now | Tax Tip of the Week | No. 182 January 23, 2013

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What Changes, What Doesn’t Change on Health Care Expenses

How exactly does one account for the taxes on health care expenses? Forbes.com blogger Kelly Phillips Erb explains how ObamaCare does and does not change the tax treatment. This is part two of a two part Tax Tip on the changes in health care.

ACCOUNTS GONE WILD

Taxpayers can defray more routine (albeit rising) out-of-pocket costs with an alphabet soup of special accounts: flexible spending accounts (FSAs); health reimbursement accounts (HRAs); health savings accounts (HSAs); and Archer medical savings accounts (MSAs), a predecessor to HSAs available only to grandfathered users.

They differ, but all allow you to pay medical expenses using pretax dollars. That’s before income tax and, for FSAs and HRAs, before payroll taxes, too.

Eligible expenses are generally the same sort of out-of-pocket costs that qualify for the medical deduction but with some mind-bending differences. For example: You can’t deduct medical expenses for someone who isn’t your dependent. But as a result of ObamaCare, if your employer allows it you can now use FSA and HRA dollars to cover expenses for non-dependent adult children under age 27. In any event, there’s no double-dipping: You can’t deduct any medical expense you have paid from one of these accounts. (Details on these accounts are in IRS Publication 969).

FSAs: SMALLER BUT USEFUL

FSAs are mostly funded by workers through contributions taken out of their paychecks. While 35 million workers use FSAs, millions more are offered them and could save tax with them.

ObamaCare put a new $2,500 limit on contributions to FSAs beginning with the 2013 plan year. Previously, there was no legal limit, but most employers set a $5,000 cap. (A two-career couple, with two accounts, can still sock away $5,000 in 2013). What ObamaCare didn’t change is that the FSA is a use-it-or-lose-it account. Money you don’t use in a given year is forfeited, although many employers (with the IRS’ blessing) give you two and a half months after the end of a year to use up that year’s cash.

HRAs, HSAs AND YOUR 1040

HRAs are set up and funded only by the employer, and if you leave your job you can’t take unused money with you. Employer contributions to an HRA are tax free to you, as are reimbursements from the account. In fact, HRAs aren’t even reported on your income tax return. 

HSAs, by contrast, are reported (on Form 8889) both when pretax money (contributed by you and/or your employer) goes in and when distributions come out. The terms of these accounts are established by Congress (not the employer), and HSAs, unlike HRAs, are available to self-employed folks, too.

For 2013, you (or you and your employer combined) can put up to $3,250 for an individual or $6,450 for a family into an HSA, plus an extra $1,000 if you are 55 or older. (For 2012 the limits are $3,100 and $6,250, plus $1,000.) But you can fund an HSA only if you’re covered exclusively by a health plan having a minimum deductible for 2013 of $1,250 for an individual, $2,500 for a family.

Unlike the FSA, the HSA is not a use-it-or-lose-it deal; the unused amount in an HSA can be rolled over from year to year while it grows tax free. If you change jobs or retire you can take the account with you. That combination makes the HSA a great way to put away money for medical expenses during retirement, when it can be used for long-term care and Medicare premiums and co-pays.

Questions?  Let us know, we will all learn these changes together. 

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

What We Know | Tax Tip of the Week | No. 181 January 16, 2013

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What Changes, and Doesn’t, Change on Health Care Expenses

How exactly does one account for the taxes on health care expenses? Forbes.com blogger Kelly Phillips Erb explains where ObamaCare does and does not change the tax treatment.  This is part one of a two part Tax Tip on the changes in health care. 

It’s been two and a half years, one Supreme Court decision and two national elections since President Barack Obama signed the Patient Protection & Affordable Care Act (a.k.a. ObamaCare). Yet the tax treatment of health care expenses–and the way the law does or doesn’t change it–continues to befuddle taxpayers. And understandably so. Here’s a primer. 

THE PHANTOM CADILLAC TAX

If you get health insurance from an employer with more than 250 workers, the Form W-2 issued in the next couple of weeks reporting your 2012 compensation to you and the Internal Revenue Service will include the value of health insurance premiums paid by your employer. (Smaller employers must start reporting the number on 2013 W-2s). 

Don’t panic. The benefits shown aren’t taxable to you. Beginning in 2018, however, “Cadillac” health insurance plans–generally those costing more than $10,200 a year for individuals or $27,500 for families–will be subject to a 40% tax on premiums. The tax won’t be levied directly on individuals but on insurance providers who will likely pass it along in the form of even higher premiums. The point is to make these plans, which often have few cost-control features, unattractive.

As for ObamaCare’s controversial penalty/tax on those who don’t have health insurance, don’t look for it on the 2012 tax forms. The “individual mandate” doesn’t kick in until 2014. A new tax credit to help lower-income folks pay for coverage purchased through new health insurance exchanges also doesn’t take effect until 2014.

DEDUCTION REDUCTIONS

Write-offs for medical expenses are being trimmed for some taxpayers. For 2012 (the tax return due this coming April), if you itemize deductions on Schedule A of a 1040, you can deduct eligible medical expenses to the extent they exceed 7.5% of your adjusted gross income (AGI). But to help pay for ObamaCare, beginning in 2013 taxpayers younger than 65 will be able to deduct these expenses only to the extent they exceed 10% of AGI. So, for example, a taxpayer with an AGI of $100,000 and $10,500 of medical expenses could claim a $3,000 deduction in 2012 but only $500 in 2013.

Those 65 and older before the end of 2013 keep the 7.5% threshold through 2016–assuming there aren’t more changes before then as part of a deficit reduction or tax reform deal. So what’s an eligible medical expense? Generally, amounts you pay out of pocket (without reimbursement from an insurance company or employer) for yourself and your dependents for dental and medical care (including prescription drugs, medical equipment and the cost of getting to and from treatment); for nursing home bills; and for long-term care and health insurance, including Medicare premiums. (See IRS Publication 502 for more details).

Self-employed taxpayers can often save more by writing off health insurance premiums as a business expense–they’re deductible only to the extent your business has a profit. In May the IRS made clear that Medicare premiums, too, qualify for that write-off if you are self employed. 

More on this topic next week….. 

As always, give us a call with any questions or concerns you may have.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Ohio Means Jobs | Tax Tip of the Week | No. 180 January 9, 2013

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The State of Ohio is Giving Away Money

Beginning January 7, 2013, the State of Ohio will begin taking applications for workforce training grants.  The program is called the “Ohio Incumbent Workforce Training Voucher Program”. 

The goal of the grants is to improve the job skills of currently employed workers.  The following is a press release issued by the state: 

“A robust, motivated, well-educated, and highly trained workforce is critical for the retention and expansion of all businesses in Ohio. In their efforts to improve their economic competitiveness, employers must find ways to consistently upgrade the skills of their workforce through educational and training opportunities. To this end, the Ohio Incumbent Workforce Training Voucher Program will fill a gap in current workforce development programs by providing needed training dollars to Ohio’s incumbent workforce through a unique public-private partnership. The ultimate goal of this program is twofold: allow employers to retain and grow their existing Ohio workforce and create a statewide workforce that can meet the present and future demands in an ever changing economy. 

This employer-driven program is targeted to provide direct financial assistance to train workers and improve the economic competitiveness of Ohio’s employers. The program is designed to offset a portion of the employer’s costs to upgrade the skills of its incumbent workforce and will provide reimbursement to eligible employers for specific training costs accrued during training. The program’s funding will be used in conjunction with private contributions to fund skill-upgrade training. Eligible employers must demonstrate that by receiving funding assistance through the Ohio Incumbent Workforce Training Voucher Program their business will not only obtain a skilled workforce but will improve their company processes and competitiveness.” 

To learn more about this program visit this site (http://development.ohio.gov/bs/bs_wtvp.htm

As always, give us a call with any questions or concerns you may have.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.