BGBC: Understand how the new tax law affects you

By Howard I Gross, Steven W. Reed, Erika M. Gowan and Casey L. Higgs

As an attorney, your life is probably hectic with the many federal and state law changes that come your way on a daily basis. On Jan. 2, 2013, President Barack Obama signed into law the American Taxpayer Relief Act of 2012. The Act extends certain tax rates, tax credits and other provisions previously enacted by other tax legislation which were generally scheduled to expire after 2012.

We’ve compiled some key takeaways from the Act so you have a better understanding of how it affects your clients and you.

The major individual tax provisions are as follows:

• The income tax rate increases to 39.6 percent (up from 35 percent) for individuals making more than $400,000 a year ($450,000 for joint filers; $425,000 for heads of household);

• The two-percentage-point reduction in payroll taxes for Old Age, Survivors and Disability Insurance tax, commonly known as the Social Security tax, will be allowed to expire;

• The higher exemption amounts for alternative minimum tax — the so-called “patch” — are made permanent, resulting in an estimated 30 million taxpayers escaping being subject to the AMT;

• Dividends and capital gains are taxed at 20 percent (up from 15 percent) for individuals making at least $400,000 ($450,000 for joint returns);

• The Personal Exemption Phase-Out, which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers and $150,000 for married taxpayers filing separately. Under the phase-out, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2 percent for each $2,500 (or portion thereof) by which the taxpayer’s adjusted gross income exceeds the applicable threshold;

• The limitation on itemized deductions, which had previously been suspended, is reinstated with a threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Thus, for taxpayers subject to the “Pease” limitation, the total amount of their itemized deductions is reduced by 3 percent of the amount by which the taxpayer’s adjusted gross income exceeds the threshold amount, with the reduction not to exceed 80 percent of the otherwise allowable itemized deductions;

• For estate, gift and generation-skipping transfer tax purposes, for individuals dying and gifts made after 2012, there is a $5 million exemption (adjusted for inflation), and the top estate, gift and GST rate is permanently increased from 35 percent to 40 percent; and

• A number of individual tax provisions have been retroactively extended through 2013. In addition, there is a five-year extension of credits that were enhanced as part of the stimulus, including the college tuition credit, the earned income tax credit and the child tax credit.

The major business tax provisions are as follows:

• Tax credits for businesses, including the research credit and the domestic production activities deduction, are generally extended through the end of 2013;

• The increased expensing limitations and treatment of certain real property as Code Sec. 179 property is retroactively extended by the Act through Dec. 31, 2013. The 2012 and 2013 maximum deduction is $500,000 with a phase-out starting at $2 million total asset purchases;

• The 15-year straight-line cost recovery period for qualified leasehold improvements was retroactively extended for 2012 and 2013. This includes improvements for qualified leasehold improvements, restaurant and retail improvements, and new buildings established by Dec. 31, 2013;

• The Act also extends and modifies the bonus depreciation provisions with respect to property placed in service after Dec. 31, 2012. For 2012 and 2013, bonus depreciation will be 50 percent of qualified asset acquisition costs for new, not used, assets;

• The Work Opportunity Tax Credit is extended for 2012 and 2013. This allows businesses a credit equal to 40 percent of the first $6,000 in wages paid to qualified new hires; and

• The New Markets Tax Credit is extended for 2012 and 2013. This allows businesses a credit of up to 39 percent of investments in low-income communities. The credit is spread over seven years with a cap of $3.5 billion each year.

Considering the above tax changes, anticipated additional tax law changes in 2013, and the provisions of the Affordable Care Act, 2013 is shaping up to be a year that proper tax planning should be a priority and can have a significant impact on how much you pay to the U.S. Department of Treasury.

Not knowing the tax rules and not planning ahead can be very detrimental to you. The time to act is now.•

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Howard I Gross, CPA/ABV/CFF, CFP; Steven W. Reed, CPA/ABV; Erika M. Gowan, CPA/CFF, CFE; and Casey L. Higgs, CPA/CFF, CFE, CVA are with BGBC Partners, LLP – Litigation, Forensic and Business Valuation. Contact BGBC at 317-633-4700 or visit www.bgbc.com. The opinions expressed are those of the authors.