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2012 & 2013 Tax Update Highlights

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This presentation includes an overview of tax changes from 2012 and what's new in 2013. …

This presentation includes an overview of tax changes from 2012 and what's new in 2013.

For more information about our tax services, visit www.cbiz.com

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  • Medical care itemized deduction threshold. The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.Health flexible spending arrangement. Effective for cafeteria plan years beginning after Dec. 31, 2012, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement for any plan year is $2,500.
  • ...The Senate and House of Representatives have voted in favor of H.R. 8, the American Taxpayer Relief Act of 2012, which will carry a price tag of a tad under $4 trillion during the period of 2013-2022. Among its many provisions, the act keeps the Bush-era tax rates intact for individuals with taxable income under $400,000 ($450,000 for married taxpayers and $425,000 for heads of household) and permanently patches the alternative minimum tax (AMT). “Today's agreement enshrines, I think, a principle into law that will remain in place as long as I am president: the deficit needs to be reduced in a way that's balanced,” President Obama said after the House vote on Jan. 1. “Everyone pays their fair share. Everyone does their part. That's how our economy works best. That's how we grow.” Rep. Dave Camp (R-MI), chairman of the House Ways and Means Committee, offered his own take on the House vote. “Today, we have acted to make [the Bush-era] tax cuts permanent—protecting middle-class Americans from the higher tax rates that were in place when President Bill Clinton occupied the White House,” Camp said. “Now that we have prevented a Democrat tax increase, the Ways and Means Committee will lead the effort to reform our tax code to make it simpler and fairer for families and small businesses, while also making American businesses and workers more competitive in the global marketplace.” The legislation, coming as millions of Americans feared their taxes would skyrocket, was “the best course of action we can take to protect as many people as possible from massive tax hikes,” Sen. Orrin Hatch (R-UT), ranking member of the Senate Finance Committee, said on Jan. 1 after the Senate vote. He went on to describe the Act as “merely a band aid for the tremendous challenges facing our country” and observed that the legislation “does not reduce federal spending to cut our more than $16 trillion debt.” Rep. Charles Rangel (D-NY), the former chairman of the House Ways and Means Committee, candidly admitted that his vote for the bill was “no profile in courage” for him since Congress “created this monster.”
  • Elimination of EGTRRA SunsettingThe provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16), other than those made permanent or extended by subsequent legislation, were set to sunset and no longer apply to tax or limitation years beginning after 2010. (Sec. 901 of EGTRRA) However, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act, P.L. 111-312) extended the EGTRRA provisions for two additional years. Thus, under pre-2012 Taxpayer Relief Act law, beginning in 2013, the EGTRRA sunset (as extended) would have wiped out a host of favorable tax rules, such as: favorable income tax rate structure for individuals; marriage penalty relief; and liberal education-related deduction rules. New law. The 2012 Taxpayer Relief Act eliminates the provision in EGTRRA that calls for its provisions to sunset. Accordingly the provisions in EGTRRA are made permanent and no longer automatically sunset in future years. (Sec. 901 of EGTRRA, as amended by Act Sec. 101(a)(1)) Reduced Individual Tax Rates Except for Higher-Income TaxpayersUnder EGTRRA, the income tax rates for individuals were 10%, 15%, 25%, 28%, 33% and 35% for tax years beginning in 2010. In addition, the size of the 15% tax bracket for joint filers and qualified surviving spouses was 200% of the 15% tax bracket for individual filers (in the so-called marriage penalty relief). The 2010 Tax Relief Act extended the lower tax rate schedules for individuals so that they remained at 10%, 15%, 25%, 28%, 33% and 35% for two additional years, through 2012. In addition, the size of the 15% tax bracket for joint filers and qualified surviving spouses remained at 200% of the 15% tax bracket for individual filers through 2012. Under pre-2012 Taxpayer Relief Act law, for tax years beginning after Dec. 31, 2012, the rates were scheduled to rise to 15%, 28%, 31%, 36% and 39.6%; and the 15% tax bracket for joint filers and qualified surviving spouses was scheduled to drop to 167% of the 15% tax bracket for individual filers. New law. For tax years beginning after 2012, the income tax rates for most individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6% as would have occurred under the EGTRRA sunset). However, a 39.6% rate will apply for income above a certain threshold (specifically, income in excess of the “applicable threshold” over the dollar amount at which the 35% bracket begins). The applicable threshold is $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. These dollar amounts are inflation-adjusted for tax years after 2013. (Code Sec. 1(i)(2) and Code Sec. 1(i)(3) , as amended by Act Sec. 101(b)(1)) In addition, with the elimination of the EGTRRA sunset, the size of the 15% tax bracket for joint filers and qualified surviving spouses remains at 200% of the 15% tax bracket for individual filers. (Code Sec. 1(i)(1)) Reduced Capital Gains & Qualified Dividends Rate Except for Higher-Income TaxpayersUnder Sec. 303 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, P.L. 108-27), as modified by Sec. 102 of P.L. 109-222, favorable tax treatment is provided for long-term capital gain and qualified dividends. However, JGTRRA provided that this treatment ended after 2010. Capital gain. For tax years beginning in 2010, for both regular tax and alternative minimum tax (AMT) purposes, the maximum rate of tax on the adjusted net capital gain of an individual is 15%. If the adjusted net capital gain would otherwise be taxed at a rate below 25% if it were ordinary income, it is taxed at a 0% rate. That part of net capital gain attributable to unrecaptured section 1250 gain (i.e., gain attributable to real estate depreciation) is taxed at a maximum rate of 25%. Net capital gain attributable to collectibles gain and section 1202 gain is taxed at a maximum rate of 28%. The 2010 Tax Relief Act provided that net capital gain was to be taxed at a maximum rate of 0/15% for two additional years, through 2012. A qualified dividend paid to individuals was taxed at the same rates as adjusted net capital gain through 2012. Thus, under pre-2012 Taxpayer Relief Act law, for tax years beginning after Dec. 31, 2012, the maximum rate of tax on an individual's adjusted net capital gain was to be 20%. Any adjusted net capital gain which otherwise would be taxed at the 15% rate was to be taxed at a 10% rate. In addition, any gain from the sale or exchange of property held more than five years that would otherwise have been taxed at the 10% capital gain rate would be taxed at an 8% rate. Any gain from the sale or exchange of property acquired after 2000 and held for more than five years, that would otherwise have been taxed at a 20% rate was to be taxed at an 18% rate. Net capital gain attributable to unrecaptured section 1250 gain was to continue to be taxed a maximum rate of 25%. Net capital gain attributable to collectibles gain and section 1202 gain was to continue to be taxed at a maximum rate of 28%. Qualified dividend income. For tax years beginning in 2010, for both the regular tax and AMT purposes, an individual's qualified dividend income was taxed at the same rates that apply to net capital gain. Thus, an individual's qualified dividend income was taxed at a 15% and (for qualified dividend income which otherwise would be taxed at a 10% or 15% rate if the special rates did not apply) at a zero rate. The amount of a taxpayer's unrecapturedCode Sec. 1250 gain taxed at a maximum 25% rate is limited to the taxpayer's net capital gain determined without regard to the taxpayer's qualified dividend income. (In addition, a taxpayer must hold stock for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date in order for dividends on the stock to qualify as qualified dividend income.) The 2010 Tax Relief Act extended for two years, through 2012, the rules excluding qualified dividend income from net capital gain in computing unrecapturedCode Sec. 1250 gain taxed at a 25% rate; and the holding period rule for determining when dividends on stock qualify as qualified dividend income. Thus, under pre-2012 Taxpayer Relief Act law, for tax years beginning after Dec. 31, 2012, dividends received by an individual were to be taxed at ordinary income tax rates. The rules excluding qualified dividend income from net capital gain in computing unrecapturedCode Sec. 1250 gain taxed at a 25% rate, and the holding period rule for determining when dividends on stock qualify as qualified dividend income were to expire for tax years beginning after Dec. 31, 2012. New law. For tax years beginning after 2012, the 2012 Taxpayer Relief Act eliminates the provision in JGTRRA that provides for its provisions to sunset. Accordingly the provisions in JGTRRA are made permanent and no longer automatically sunset in future years. (Sec. 303 of JGTRRA, as amended by Act Sec. 102(a)) For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). (Code Sec. 1(h)(1), as amended by Act Sec. 102(b)) When accounting for Code Sec. 1411's 3.8% surtax on investment-type income and gains for tax years beginning after 2012, the overall rate for higher-income taxpayers will be 23.8%. For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will permanently be subject to a 0% rate. (Code Sec. 1(h)(1)(B), as amended by Act Sec. 102(c)(2)) Taxpayers who are subject to a 25%-or-greater rate on ordinary income, but whose income levels fall below the $400,000/$450,000 thresholds, will continue to be subject to a 15% rate on capital gains and dividends. The rate will be 18.8% for those subject to the 3.8% surtax (i.e, those with modified adjusted gross income (MAGI) over $250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).
  • ¶ 304. Standard deduction marriage penalty relief is made permanentCode Sec. 63(c)(2), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. None, 2012 Taxpayer Relief Act §101(a)(1)Generally effective: Tax years beginning after Dec. 31, 2012Committee Reports, NoneIndividuals who don't elect to itemize their deductions are allowed, instead, to deduct from their adjusted gross income (AGI) an inflation-adjusted basic standard deduction to determine their taxable income. ( FTC 2d/Fin ¶A-2800; USTR ¶634; TaxDesk ¶562,001; ) The basic standard deduction in 2012 is $5,950 for unmarrieds, $11,900 for marrieds filing jointly and surviving spouses, $5,950 for marrieds filing separately, and $8,700 for heads of household. FTC 2d/Fin ¶A-2800; FTC 2d/Fin ¶A-2803; USTR ¶634; TaxDesk ¶562,002; Under the standard deduction rules in effect before the 2001 Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the basic standard deduction for married taxpayers filing jointly and qualified surviving spouses was the statutory amount of $5,000, as adjusted annually for inflation; for single taxpayers who weren't surviving spouses or heads of household, it was the statutory amount of $3,000, as adjusted annually for inflation; for marrieds filing separately, it was the statutory amount of $2,500, as adjusted annually for inflation. So, the basic standard deduction amount for joint filers and surviving spouses under the pre-EGTRRA rules was 167% (1.6667 × $3,000 = $5,000) of the basic standard deduction amount for single taxpayers who weren't surviving spouses or heads of household. And the standard deduction for marrieds filing separately was half the joint filer amount. FTC 2d/Fin ¶A-2800.1; USTR ¶634; TaxDesk ¶562,002; RIA observation: A “marriage penalty“ exists when the combined tax liability of a married couple filing a joint return is greater than the sum of the tax liabilities of each individual computed as if they weren't married.EGTRRA/JGTRRA/WFTRA changes. EGTRRA (Sec. 301, PL 107-16, 6/7/2001), as amended by the Jobs Growth and Tax Relief Reconciliation Act of 2003 (JGTRRA, Sec. 103, PL 108-27, 5/28/2003 ), and the Working Families Tax Relief Act of 2004 (WFTRA, Sec. 101(b), PL 108-311, 10/4/2004 ), increased the basic standard deduction for joint filers and surviving spouses to 200% of the dollar amount in effect for an unmarried individual or a married taxpayer filing a separate return for the tax year. FTC 2d/Fin ¶A-2803; USTR ¶634; TaxDesk ¶562,002; RIA observation: The EGTRRA increase in the basic standard deduction amount for joint filers was intended to mitigate the so-called “marriage penalty.”EGTRRA also made the basic standard deduction for marrieds filing separately equal to the basic standard deduction for single filers. FTC 2d/Fin ¶A-2803; USTR ¶634; TaxDesk ¶562,002; Sunset for tax years beginning after 2012. A sunset provision in Sec. 901 of EGTRRA (Sec. 901, PL 107-16, 6/7/2001 ), to which the applicable JGTRRA (Sec. 107, PL 108-27, 5/28/2003 ) and WFTRA (Sec. 105, PL 108-311, 10/4/2004 ) provisions are made subject, had provided that all changes made by EGTRRA wouldn't apply to tax years beginning after Dec. 31, 2010. FTC 2d/Fin ¶T-11051; FTC 2d/Fin ¶T-11061; FTC 2d/Fin ¶T-11071; USTR ¶79,006.86; TaxDesk ¶880,011; The 2010 Tax Relief Act (P.L. 111-312, 12/17/2010) extended the sunset in Sec. 901 of EGTRRA from “tax years beginning after Dec. 31, 2010” to “tax years beginning after Dec. 31, 2012.” (Sec. 901, PL 107-16, 6/7/2001, as amended by Sec. 101(a)(1), PL 111-312, 12/17/2010 ) So, the basic standard deduction for a married couple filing a joint return was increased to twice the basic standard deduction for an unmarried individual filing a single return through 2012. And the basic standard deduction for marrieds filing separately was made equal to the basic standard deduction for single filers through 2012. ( Code Sec. 63(c)(2)(C))Under pre-2012 Taxpayer Relief law, the standard deduction rules would have reverted to pre-EGTRRA law for tax years beginning after 2012. FTC 2d/Fin ¶A-2803; USTR ¶634; TaxDesk ¶562,002; New Law. The 2012 Taxpayer Relief Act repeals the EGTRRA sunset provision. ( (2012 Taxpayer Relief Act §101(a))).RIA observation: In other words, by deleting the EGTRRA sunset provision as it applies to the EGTRRA/JGTRRA/WFTRA changes to the standard deduction rules, the Act extends permanently the standard deduction marriage penalty relief that otherwise would have expired at the end of 2012. The basic standard deduction for a married couple filing a joint return continues to be twice the basic standard deduction for an unmarried individual filing a single return. And, the basic standard deduction for marrieds filing separately equals the basic standard deduction for single filers.Effective: Tax years beginning after Dec. 31, 2012 (2012 Taxpayer Relief Act §101(a)(3)) ¶ 601. $1,000 per child amount and expanded refundability of child tax credit are permanently extended Code Sec. 24(a), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. 24(d)(1), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. 32(n), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. None, 2012 Taxpayer Relief Act §101(a)(1)Generally effective: Tax years beginning after Dec. 31, 2012.Committee Reports, NoneAn individual may claim a child tax credit (CTC) for each qualifying child under the age of 17. ( FTC 2d/Fin ¶A-4050; et seq. USTR ¶244; TaxDesk ¶569,100; et seq.) EGTRRA changes. Sec. 201 of the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA, Sec. 201, PL 107-16, 6/7/2001 ) as amended by the 2003 Jobs and Growth Tax Relief Reconciliation Act (JGTRRA, Sec. 101(a), PL 108-27, 5/28/2003 ) and the 2004 Working Families Tax Relief Act (WFTRA, Sec. 101(a), PL 108-311, 10/4/2004 , Sec. 102(a), PL 108-311, 10/4/2004 ), modified the CTC as follows: (1) the per-child amount of the CTC was gradually increased to $1,000 (from $500). FTC 2d/Fin ¶A-4051; USTR ¶244; TaxDesk ¶569,100; (2) the CTC was made refundable for all taxpayers with qualifying children, regardless of the number of children, to the extent of 15% of the taxpayer's earned income in excess of a threshold amount (the “earned income formula”). The statutory threshold amount of $10,000 was indexed for inflation from 2001 (see ¶602 for use of $3,000 threshold). Families with three or more children were allowed to compute their refundable CTC using either (a) the earned income formula or (b) the formula available to them under pre-EGTRRA law—the excess, if any, of the taxpayer's social security taxes over the earned income credit (EIC) for the year. FTC 2d/Fin ¶A-4055; USTR ¶244.02; TaxDesk ¶569,100; (3) Code Sec. 32(n), which provided that a portion of the CTC was to be treated as a supplemental child credit amount added to the EIC otherwise allowable to the taxpayer, was eliminated. This supplemental child credit was subtracted from the taxpayer's other allowable credits, and had no impact on the total amount of credits allowed to the taxpayer. FTC 2d/Fin ¶A-4200; Sunset. Under Sec. 901 of EGTRRA, to which the applicable JGTRRA FTC 2d/Fin ¶T-11061; FTC 2d/Fin ¶T-11060; USTR ¶79,006.87; TaxDesk ¶880,013; and WFTRA FTC 2d/Fin ¶T-11070; FTC 2d/Fin ¶T-11071; USTR ¶79,006.88; TaxDesk ¶880,015; provisions were made subject, all of these changes were scheduled to expire after the EGTRRA sunset date. The pre-EGTRRA rules—i.e., the $500 per child CTC amount, the credit's refundability only for families with more than two qualifying children and only to the extent the taxpayer's social security taxes exceed the EIC, and the Code Sec. 32(n) supplemental child credit—were scheduled to come back into effect in tax years beginning after the sunset date. FTC 2d/Fin ¶T-11050; FTC 2d/Fin ¶T-11051; USTR ¶79,006; TaxDesk ¶880,011; Under pre-2012 Taxpayer Relief Act law, the EGTRRA enhancements to the CTC were scheduled to sunset, and the pre-EGTRRA rules were to apply, for tax years beginning after Dec. 31, 2012. FTC 2d/Fin ¶A-4050; New Law. The 2012 Taxpayer Relief Act eliminates the EGTRRA sunset by striking Title IX of EGTRRA (i.e., Sec. 901, the sunset provision). Thus, the EGTRRA changes to the CTC that are listed at (1)–(3) are made permanent. (Sec. 901, PL 107-16, 6/7/2001 as amended by 2012 Taxpayer Relief Act §101(a)(1))RIA observation: As a result of the 2012 Taxpayer Relief Act's repeal of the EGTRRA sunset provision, for tax years after 2012 (see effective date below): ... the per-child amount of the CTC is $1,000. ... the CTC is refundable for all taxpayers with qualifying children, regardless of the number of children, to the extent of 15% of the taxpayer's earned income in excess of a threshold amount (see ¶602 ). ... Code Sec. 32(n), which provided that a portion of the CTC was to be treated as a supplemental child credit amount added to the taxpayer's EIC, is permanently eliminated. For the extension through 2017 of the $3,000 threshold used to determine the refundable portion of the credit, see ¶602 .Effective: For tax years beginning after Dec. 31, 2012. (2012 Taxpayer Relief Act §101(a)(3))
  • ¶ 603. EGTRRA-expanded dependent care credit permanently extendedCode Sec. 21, 2012 Taxpayer Relief Act §101(a)(1)Code Sec. None, 2012 Taxpayer Relief Act §101(a)(1)Generally effective: Tax years beginning after Dec. 31, 2010 and before Jan. 1, 2013Committee Reports, NoneTaxpayers who have one or more qualifying individuals (a dependent qualifying child under age 13, or a dependent or spouse who is incapable of self-care and has the same principal place of abode as the taxpayer for more than half the tax year) are allowed a dependent care credit equal to a percentage of the expenses paid for the care of the qualifying individual(s) that enable the taxpayer to be gainfully employed (“eligible expenses”). EGTRRA changes. Sec. 204 of the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA, Sec. 204, PL 106-17, 6/7/2001 ) increased the dependent care credit's credit percentage, credit base, and maximum credit. The maximum credit is $1,050 (35% of up to $3,000 of eligible expenses) if there is one qualifying individual, and $2,100 (35% of up to $6,000 of eligible expenses) if there are two or more qualifying individuals. The 35% credit rate is reduced, but not below 20%, by one percentage point for each $2,000 (or fraction thereof) of adjusted gross income (AGI) above $15,000. FTC 2d/Fin ¶A-4300; FTC 2d/Fin ¶A-4301; FTC 2d/Fin ¶A-4302; USTR ¶214; USTR ¶214.04; TaxDesk ¶569,301; TaxDesk ¶569,302; Sunset. The EGTRRA enhancements to the dependent care credit were subject to the EGTRRA sunset provision (Sec. 901, PL 106-17, 6/17/2001 ) (see FTC 2d/Fin ¶T-11051; TaxDesk ¶880,011; ). After the EGTRRA sunset date (Dec. 31, 2010), the credit percentage, credit base, and maximum credit all were scheduled to revert to the lower pre-EGTRRA levels for 2011 and later years. That is, the credit percentage would drop to 30% and begin to phase out at AGI of $10,000. The maximum credit would drop to $720 (30% of up to $2,400 of eligible expenses) for one qualifying individual, and to $1,440 (30% of up to $4,800 of eligible expenses) for two or more. (See FTC 2d/Fin ¶A-4302; )However, the 2010 Tax Relief Act (Sec. 101(a)(1), PL 111-312, 12/17/2010 ) provided that the EGTRRA sunset would not take effect until after Dec. 31, 2012 (instead of after Dec. 31, 2010), thus extending the dependent care credit enhancements (above) for two years.New Law. The 2012 Taxpayer Relief Act makes the dependent care credit enhancements “permanent” (i.e., the enhancements remain in force until Congress changes them) by eliminating the EGTRRA sunset provision in its entirety. (2012 Taxpayer Relief Act §101(a)(1))RIA observation: Thus, the dependent care credit enhancements discussed above are permanently extended, and continue in force without being subject to sunset provisions.Effective: Tax years beginning after Dec. 31, 2012. (2012 Taxpayer Relief Act §101(a)(3)) © 2013 Thomson Reuters/RIA. All rights reserved.
  • ¶ 604. Expanded adoption credit rules (but not refundability) made permanentCode Sec. 36C, 2012 Taxpayer Relief Act §101(a)(1) Code Sec. 23, 2012 Taxpayer Relief Act §101(a)(1) Code Sec. None, 2012 Taxpayer Relief Act §101(a)(1) Generally effective: Tax years beginning after Dec. 31, 2012Committee Reports, NoneUnder Code Sec. 23, individuals are allowed a credit against income tax and alternative minimum tax (AMT) for qualified adoption expenses paid or incurred for the adoption of an eligible child. The credit is nonrefundable subject to a limitation based on tax liability. The maximum credit is $12,650 per eligible child for 2012. The credit begins to phase out for taxpayers with modified adjusted gross income (AGI) over $189,710 for 2012 and is fully eliminated at modified AGI of $229,710 for 2012. All these dollar amounts are adjusted annually for inflation. ( FTC 2d/Fin ¶A-4400; et seq. USTR ¶234; TaxDesk ¶569,500; et seq.) EGTRRA sunset provision. The adoption expense credit rules discussed above reflect changes made to expand the adoption credit that existed before the enactment of the 2001 Economic Growth And Tax Relief and Reconciliation Act (EGTRRA). The EGTRRA changes (see below) were subject to the EGTRRA sunset provision, i.e., EGTRRA Sec. 901 (Sec. 901, PL 107-16, 6/7/2001 ), which made these EGTRRA provisions inapplicable to tax years beginning after Dec. 31, 2010. However, Sec. 10909(c) of the 2010 Patient Protection and Affordable Health Care Act (PPACA, PL 111-148, 3/23/2010 ) delayed the EGTRRA sunset for the adoption credit changes (including those made under both EGTRRA and PPACA, see below) by one year, until Dec. 31, 2011. EGTRRA changes. The EGTRRA changes, made in EGTRRA §202 (Sec. 202, PL 107-16, 6/7/2001 ): (1) increased the maximum per-child credit from $5,000 ($6,000 for special needs adoptions) to $10,000 for all adoptions; (2) increased the modified AGI starting point for the credit phase-out from $75,000 to $150,000; (3) for special needs adoptions, allowed the $10,000 maximum credit regardless of actual expenses, and liberalized certain timing rules; (4) provided for inflation adjustments to the $10,000/$150,000 statutory dollar amounts; (5) for non-special needs adoptions, made the credit permanent (as was the case for special needs adoptions) by eliminating the scheduled Dec. 31, 2001 termination date; and (6) allowed the credit against AMT by making it subject to a separate tax liability limitation instead of Code Sec. 26(a)(1) (which generally prevents the offset of AMT by nonrefundable personal credits). PPACA changes. The PPACA changes, made in PPACA §10909 (Sec. 10909, PL 111-148, 3/23/2010 ): (a) increased the maximum per-child credit from $12,170 to $13,170 (indexed for inflation after 2010); (b) made the credit refundable (instead of nonrefundable) by redesignating the former Code Sec. 23 adoption credit provisions as Code Sec. 36C; (c) eliminated the separate tax liability limitation and carryover rules that applied (under former Code Sec. 23) when the credit was nonrefundable; and (d) deleted references to Code Sec. 23 from the tax liability limitation and carryover rules for certain other credits to account for the adoption credit being changed to a refundable credit. PPACA 2011 sunset and extension of EGTRRA sunset. The EGTRRA changes expanding the adoption credit rules (items (1) through (6), above), which were subject to the PPACA §10909(c) sunset date (and so were scheduled to sunset in tax years beginning after Dec. 31, 2011, see above), were extended for one year, through 2012 (under Sec. 101(a)(1), PL 111-312, 12/17/2010 ).The PPACA sunset provision was not similarly extended. Thus, the PPACA changes (items (a) through (d), above) don't apply in tax years beginning after Dec. 31, 2011. As a result, the credit is refundable for only two years (2010 and 2011). FTC 2d/Fin ¶T-11050; FTC 2d/Fin ¶T-11054; USTR ¶79,006.86; TaxDesk ¶880,017; RIA observation: The Dec. 31, 2011 sunset date for the PPACA changes meant that the changes listed in items (a) through (d), above, didn't apply for tax years beginning after Dec. 31, 2011. Thus, the adoption credit rules reverted to pre-PPACA law. This means that, in 2012: ... the maximum per-child credit was reduced (in 2012, the credit was $12,650, see above); ... the credit wasn't refundable, and was provided under Code Sec. 23, instead of former Code Sec. 36C; ... the credit was subject to the tax liability limitations (under either Code Sec. 26(a)(2) or Code Sec. 23(b)(4), whichever applied, see ¶403 ) and carryover rules that applied before the PPACA changes were enacted; and ... the references to Code Sec. 23 that were deleted from certain credit provisions (see (d), above) were restored. Effect of 2012 EGTRRA sunset. The EGTRRA changes (listed in items (1) through (6), above) were scheduled to become inapplicable after the Dec. 31, 2012 sunset date. RIA observation: The Dec. 31, 2012 sunset date for the EGTRRA changes meant that the changes listed in items (1) through (6), above, wouldn't have applied for tax years beginning after Dec. 31, 2012. Thus, the adoption credit rules would have reverted to pre-EGTRRA law. This would have meant that, starting in 2013:the credit would have been available only for special needs adoptions;the maximum per-child credit would have dropped to $6,000, and would have depended on actual expenses;the modified AGI starting point for the credit phase-out would have been reduced to $75,000—i.e., the credit would have been eliminated at modified AGI of $115,000;absent a further extension of Code Sec. 26(a)(2) (see ¶403 ), the credit wouldn't have been allowed against AMT because it would have been subject to the general Code Sec. 26(a)(1) tax liability limitation.New Law. The 2012 Taxpayer Relief Act permanently extends the EGTRRA changes made to the adoption expense credit by deleting the EGTRRA sunset provision. (2012 Taxpayer Relief Act §101(a)(1))RIA observation: The adoption expense credit, as expanded by EGTRRA (see items (1) through (6), above), is no longer subject to a sunset provision. Thus, for example, the credit will continue to apply for non-special needs adoptions as well as special needs adoptions, and will continue to be allowed against the AMT. However, the PPACA changes are not part of the credit. Thus, for example, the credit remains nonrefundable, and continues to be provided in Code Sec. 23.Effective: Tax years beginning after Dec. 31, 2012. (2012 Taxpayer Relief Act §101(a)(1))309. The adoption assistance exclusion is made permanentCode Sec. 137, 2012 Taxpayer Relief Act §101(a)(1) Code Sec. None, 2012 Taxpayer Relief Act §101(a)(1) Generally effective: Tax years beginning after 2012Committee Reports, NoneEmployees can exclude from gross income the qualified adoption expenses paid or reimbursed by an employer under an employer-provided adoption assistance program. The exclusion is subject to both (1) a dollar limit (under which the total amount of excludible adoption expenses cannot exceed a maximum amount), and (2) an income limit (under which the exclusion is ratably phased out over a certain income range, based on modified adjusted gross income (AGI)).The 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA, PL 107-16, 6/7/2001 ) made modifications to the adoption assistance exclusion, as described below.EGTRRA (Sec. 202, PL 107-16, 6/7/2001 ) modified the exclusion by: (1) increasing the maximum exclusion from $5,000 ($6,000 for special needs adoptions) to $10,000 (for all adoptions); (2) allowing the maximum exclusion amount for special needs adoptions, without regard to the amount of adoption expenses actually incurred; (3) increasing the income phase-out range from a range of $75,000 to $115,000, to a range of $150,000 to $190,000; (4) providing that the dollar limit and the income limit are to be adjusted for inflation; and (5) making the exclusion “permanent” (instead of being set to expire after Dec. 31, 2001, as provided under pre-EGTRRA law), but still subject to EGTRRA's sunset provision (Sec. 901, PL 107-16, 6/7/2001 ) which provided that all changes made by EGTRRA (including the changes to the adoption assistance exclusion described above) were not to apply to tax years beginning after Dec. 31, 2010 (the EGTRRA sunset date). The 2010 Tax Relief Act extended the adoption assistance exclusion as expanded by EGTRRA for one year (through 2012). The 2010 Act accomplished this by amending the EGTRRA sunset provision by replacing the Dec. 31, 2010 sunset date with a Dec. 31, 2012 sunset date. Thus, under the 2010 Tax Relief Act, the changes made to the exclusion by EGTRRA (items (1) through (5), above) were extended through 2012.For tax years beginning in 2012: ... the maximum exclusion was $12,170, as adjusted for inflation; and ... the phase-out range was $182,520 to $222,520, as adjusted for inflation. For tax years beginning after Dec. 31, 2012, the adoption assistance exclusion was going to revert to pre-EGTRRA law, which provided that the exclusion was to expire for amounts paid, or expenses incurred, after Dec. 31, 2001. Thus, for tax years beginning after 2012, the exclusion was not going to be available. FTC 2d/Fin ¶H-1450; FTC 2d/Fin ¶H-1451; FTC 2d/Fin ¶H-1453; USTR ¶1374; TaxDesk ¶133,603; TaxDesk ¶133,605; New Law. The 2012 Taxpayer Relief Act permanently extends the adoption assistance exclusion. The 2012 Act accomplishes this by repealing EGTRRA Title IX, which contains the EGTRRA Sec. 901 sunset provision (Title IX, PL 107-16, 6/7/2001 as repealed by 2012 Taxpayer Relief Act §101(a)(1))RIA observation: For tax years beginning in 2013 (and years thereafter), it is anticipated that IRS will issue inflation-adjusted amounts for the maximum exclusion and the phase-out range.Effective: For tax years beginning after Dec. 31, 2012. (2012 Taxpayer Relief Act §101(a)(3))
  • ¶ 705. Exclusion for employer-provided educational assistance, and restoration of the exclusion for graduate-level courses, made permanentCode Sec. 127, 2012 Taxpayer Relief Act §101(a)(1)Generally effective: Tax years beginning after 2012Committee Reports, NoneUnder Code Sec. 127, an employee's gross income does not include amounts paid or expenses incurred (up to $5,250 annually) by the employer in providing educational assistance to employees under an educational assistance program. An educational assistance program is a separate written plan of the employer for the exclusive benefit of its employees, having the purpose of providing the employees with educational assistance. The courses taken need not be related to the employee's job for the exclusion to apply. To be qualified, the program must not discriminate in favor of highly compensated employees, nor may more than 5% of the amounts paid or incurred by the employer for educational assistance during the year be provided for individuals (and their spouses and dependents) owning more than 5% of the employer. Further, the program cannot provide employees with a choice between educational assistance and other remuneration that would be includible in their gross income. Finally, reasonable notification of the program's availability and terms must be provided to employees.Before the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA), Congress had periodically waited until the educational assistance exclusion was set to expire before renewing it, and had sometimes allowed it to expire, and then extended it retroactively. The exclusion was set to expire for courses beginning after Dec. 31, 2001. Under EGTRRA (Sec. 411(a), PL 107-16, 6/7/2001 ), the exclusion was extended “permanently” subject to the EGTRRA sunset, described below. FTC 2d/Fin ¶H-2050; FTC 2d/Fin ¶H-2064; USTR ¶1274; TaxDesk ¶136,525; Pension & Benefits Explanations ¶127-4; Benefits Coordinator Analysis ¶119,210; Also EGTRRA (Sec. 411(b), PL 107-16, 6/7/2001 ), restored the exclusion for graduate level courses, which had earlier been eliminated. This was also subject to the EGTRRA sunset, described below. FTC 2d/Fin ¶H-2065; USTR ¶1274.01; TaxDesk ¶136,525; Pension & Benefits Explanations ¶127-4.01; Benefits Coordinator Analysis ¶119,211; Sunset after 2012. With certain exceptions not relevant here, all provisions of, and amendments made by, EGTRRA did not apply to tax, plan, or limitation years beginning after Dec. 31, 2010. (Sec. 901(a), PL 107-16, 6/7/2001 ) Under this sunset rule, the Code was to have been applied and administered to tax, plan, or limitation years beginning after Dec. 31, 2010, as if the provisions of, and amendments made by, EGTRRA had never been enacted. (Sec. 901(a), PL 107-16, 6/7/2001 ) Thus, for tax years beginning after Dec. 31, 2010, the specific exclusion for employer-provided educational assistance would have expired along with the restoration of the exclusion to graduate courses.The 2012 Tax Relief Act extended the EGTRRA sunset date from Dec. 31, 2010 to Dec. 31, 2012. (EGTRRA §901, amended by Sec. 101(a)(1), PL 111-312, 12/17/2010 ). Thus, the Code Sec. 127 exclusion, including the assistance for graduate courses, would have expired after 2012. FTC 2d/Fin ¶T-11051; USTR ¶79,006.86; TaxDesk ¶147,105; Pension & Benefits Explanations ¶7900-6.86; New Law. Under the 2012 Taxpayer Relief Act, the EGTRRA sunset as extended by the 2010 Tax Relief Act to Dec. 31, 2012, is repealed. (EGTRRA §901, as amended by 2010 Tax Relief Act §101(a)(1), repealed by 2012 Taxpayer Relief Act §101(a)(1)).RIA observation: Thus, the Code Sec. 127 exclusion, including the assistance for graduate courses, is made permanent.Effective: For tax years beginning after Dec. 31, 2012. (2012 Taxpayer Relief Act §101(a)(3)) Personal Nonrefundable Credits May Offset AMT and Regular Tax for All Tax YearsNonrefundable personal credits—other than the adoption credit, the child credit, the savers' credit, the residential energy efficient property credit, the non-depreciable property portions of the alternative motor vehicle credit, the qualified plug-in electric vehicle credit, and the new qualified plug-in electric drive motor vehicle credit—were to be allowed for 2012 only to the extent that the individual's regular income tax liability exceeded his tentative minimum tax, determined without regard to the minimum tax foreign tax credit. RIA observation: Thus, under pre-Act law, many nonrefundable personal credits couldn't offset AMT. The AMT could also indirectly limit a taxpayer's nonrefundable personal tax credits even in situations where the taxpayer wasn't liable for the AMT. New law. Retroactively effective for tax years beginning after 2011, the Act permanently allows an individual to offset his entire regular tax liability and AMT liability by the nonrefundable personal credits. (Code Sec. 26(a), as amended by Act Sec. 104(c)) RIA observation: The rule allowing nonrefundable personal credits to reduce the AMT (as well as regular tax) benefits middle income individuals who: (a) have low taxable income (and thus a low regular tax), e.g., because of a large number of personal exemptions; (b) are subject to the AMT because personal exemptions (as well as the standard deduction and certain itemized deductions) generally are not allowed in computing the AMT; and (c) have substantial nonrefundable personal credits.
  • ¶ 704. Increased $2,000 contribution limit and other EGTRRA enhancements to Coverdell ESAs are made permanentCode Sec. 25A(e), 2012 Taxpayer Relief Act §101(a)(1) Code Sec. 530(b)(1), 2012 Taxpayer Relief Act §101(a)(1) Code Sec. 530(b)(1)(A)(iii), 2012 Taxpayer Relief Act §101(a)(1) Code Sec. 530(b)(2), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. 530(b)(4), 2012 Taxpayer Relief Act §101(a)(1) Code Sec. 530(b)(5), 2012 Taxpayer Relief Act §101(a)(1) Code Sec. 530(c)(1), 2012 Taxpayer Relief Act §101(a)(1) Code Sec. 530(d)(2), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. 530(d)(2)(C), 2012 Taxpayer Relief Act §101(a)(1) Code Sec. 530(d)(2)(D), 2012 Taxpayer Relief Act §101(a)(1) Code Sec. 530(d)(4)(C)(i), 2012 Taxpayer Relief Act §101(a)(1) Code Sec. 4973(e)(1)(A), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. 4973(e)(1)(B), 2012 Taxpayer Relief Act §101(a)(1) Code Sec. None, 2012 Taxpayer Relief Act §101(a)(1)Generally effective: For tax years beginning after Dec. 31, 2012Committee Reports, NoneAn individual can make a nondeductible cash contribution to a Coverdell education savings account (“Coverdell ESA,” or “CESA,” formerly called an “education IRA”) for qualified education expenses of a beneficiary under the age of 18. A specified aggregate amount can be contributed each year by all contributors for one beneficiary. The amount an individual contributor can contribute is phased out as the contributor's modified adjusted gross income (MAGI) exceeds specified levels. A 6% excise tax applies to excess contributions.Earnings on the contributions made to a CESA are subject to tax when withdrawn. But distributions from a CESA are excludable from the distributee's (i.e., the student's) gross income to the extent the distributions don't exceed the qualified education expenses incurred by the beneficiary during the tax year the distributions are made. The earnings portion of a CESA distribution not used to pay qualified education expense is includible in a distributee's income, and that amount is subject to a 10% tax that applies in addition to the regular tax.Tax-free (including free of the 10% tax described above) transfers or rollovers of CESA account balances from a CESA benefiting one beneficiary to a CESA benefitting another beneficiary (and redesignations of named beneficiaries) are permitted if the new beneficiary is a family member of the previous beneficiary and is under age 30. Generally, a balance remaining in a CESA is deemed to be distributed within 30 days after the beneficiary turns 30.EGTRRA/WFTRA changes. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA,” Sec. 401, PL 107-16, 6/7/2001 ), with a technical correction under the Working Families Tax Relief Act of 2004 (“WFTRA,” Sec. 404, PL 108-311, 10/4/2004 , the CESA rules were modified to:increase the limit on CESA aggregate annual contributions (from $500) to $2,000 per beneficiary FTC 2d/Fin ¶A-4600; FTC 2d/Fin ¶A-4601; FTC 2d/Fin ¶A-4603; USTR ¶5304; TaxDesk ¶147,201; TaxDesk ¶147,203; ;permit corporations and other entities (in addition to individuals) to make contributions to a CESA, regardless of the corporation's or entity's income FTC 2d/Fin ¶A-4602; FTC 2d/Fin ¶A-4604; USTR ¶5304; TaxDesk ¶147,202; TaxDesk ¶147,204; ;increase the MAGI phaseout range for joint filers (from $150,000 through $160,000) to $190,000 through $220,000, i.e., to equal twice the range for single filers (i.e., $95,000 through $110,000), and so eliminate any “marriage penalty” FTC 2d/Fin ¶A-4604; USTR ¶5304.01; TaxDesk ¶147,204; ;permit contributions to a CESA for a tax year to be made until Apr. 15 of the following year FTC 2d/Fin ¶A-4606; USTR ¶5304.01; TaxDesk ¶147,206; ;modify the definition of excess contribution to a CESA for purposes of the 6% excise tax on excess contributions to reflect various other EGTRRA changes FTC 2d/Fin ¶A-4607; USTR ¶49,734; TaxDesk ¶147,207; ;extend the time (to before June 1 of the following tax year) for taxpayers to withdraw excess contributions (and the earnings on them) to avoid imposition of the 6% excise tax FTC 2d/Fin ¶A-4608; USTR ¶49,734; TaxDesk ¶147,208; ;expand the definition of education expenses that can be paid by CESAs to include elementary and secondary school expenses (in addition to qualified higher education expenses) FTC 2d/Fin ¶A-4610; FTC 2d/Fin ¶A-4611; FTC 2d/Fin ¶A-4625; USTR ¶5304; TaxDesk ¶147,210; TaxDesk ¶147,211; TaxDesk ¶147,225; ;provide for coordination of the Hope and Lifetime Learning credits with the CESA rules to permit a Hope or Lifetime Learning credit to be taken in the same year as a tax-free distribution is taken from a CESA for a designated beneficiary (but for different expenses) (under pre-EGTRRA law, a taxpayer couldn't claim a Hope credit in the same year he claimed an income exclusion from a CESA) FTC 2d/Fin ¶A-4613; USTR ¶5304.01; TaxDesk ¶147,213; ;provide rules coordinating distributions from both a qualified tuition program (QTP, or “529 plan”) and a CESA for the same beneficiary for the same tax year (but for different expenses) FTC 2d/Fin ¶A-4614; USTR ¶5304.01; TaxDesk ¶147,214; ;eliminate the age limitations described above for acceptance of CESA contributions, deemed balance distributions, tax-free rollovers to other family-member-beneficiaries, and tax-free change of beneficiaries, for “special needs beneficiaries” FTC 2d/Fin ¶A-4601; FTC 2d/Fin ¶A-4615; FTC 2d/Fin ¶A-4616; FTC 2d/Fin ¶A-4617; FTC 2d/Fin ¶A-4619; FTC 2d/Fin ¶A-4620; USTR ¶5304; USTR ¶5304.01; TaxDesk ¶147,201; TaxDesk ¶147,215; TaxDesk ¶147,216; TaxDesk ¶147,217; TaxDesk ¶147,219; TaxDesk ¶147,220; ; andprovide that the 10% additional tax on taxable distributions from a CESA doesn't apply to distributions of contributions to a CESA made by June 1 of the tax year following the tax year in which the contribution was made FTC 2d/Fin ¶A-4618; USTR ¶5304.01; TaxDesk ¶147,218; .Sunset. Under Sec. 901 of EGTRRA (Sec. 901, PL 107-16, 6/7/2001 ), to which the applicable WFTRA provision (Sec. 404(f), PL 108-311, 10/4/2004 ) is made subject, all of the EGTRRA/WFTRA changes described above were scheduled to expire for tax years beginning after Dec. 31, 2010. The 2010 Tax Relief Act extended the EGTRRA/WFTRA rules by providing that the EGTRRA sunset wouldn't take effect until after Dec. 31, 2012. (Sec. 901, PL 107-16, 6/7/2001 as amended by 2012 Taxpayer Relief Act §101(a)(1)) FTC 2d/Fin ¶T-11051; FTC 2d/Fin ¶T-11071; USTR ¶79,006.86; TaxDesk ¶880,011; .After the sunset date, the CESA rules in effect before the passage of EGTRRA were scheduled to come back into effect.New Law. The 2012 Tax Relief Act permanently extends the EGTRRA/WFTRA rules, by deleting the EGTRRA sunset provision. (2012 Taxpayer Relief Act §101(a)(1))RIA observation: Specifically, as a result of the above extension, the following rules apply on a permanent basis:the limit on CESA aggregate annual contributions is $2,000 per beneficiary (and isn't decreased to $500 per beneficiary);corporations and other entities (not just individuals) can make contributions to a CESA, and the corporations and other entitles can do so regardless of their income;the MAGI phaseout range for joint filers is 190,000-$220,000 (and doesn't decrease to $150,000-$160,000);CESA contributions for a tax year can be made until Apr. 15 of the following year;the definition of CESA excess contribution reflects the various other EGTRRA changes to the CESA rules;taxpayers have until June 1 of the following tax year to withdraw excess contributions (and the earnings on them) to avoid imposition of the 6% excise tax;education expenses that can be paid by CESAs include elementary and secondary school expenses and qualified higher education expenses (rather than only qualified higher education expenses);a Hope or Lifetime Learning credit can be taken in the same year as a tax-free distribution is taken from a CESA for a designated beneficiary (but for different expenses);the rule coordinating distributions being made from both a QTP and a CESA for the same beneficiary for the same tax year (but for different expenses) applies;special needs beneficiaries are exempted from the age limitations for a CESA's acceptance of contributions, deemed balance distributions, tax-free rollovers to other family-member-beneficiaries, and tax-free change of beneficiaries; andthe 10% additional tax on taxable distributions from a CESA is inapplicable to distributions of contributions to a CESA made by June 1 of the tax year following the tax year in which the contribution was made.Effective: Tax years beginning after Dec. 31, 2012. (2012 Taxpayer Relief Act §101(a)(3))
  • No Phase-Out of Personal Exemptions Except for Higher-Income TaxpayersPersonal exemptions generally are allowed for the taxpayer, his or her spouse, and any dependents. For tax years beginning in 2010, there was no overall reduction in the personal exemption amount based on the taxpayer's AGI. For tax years beginning after Dec. 31, 2010, the total amount of exemptions that could be claimed by a taxpayer was to be reduced (personal exemption phaseout (PEP)) by 2% for each $2,500 (or portion thereof) by which the taxpayer's AGI exceeds the applicable threshold. The phase-out rate was to be 2% for each $1,250 for married taxpayers filing separate returns. However, the 2010 Tax Relief Act provided that a higher-income taxpayer's personal exemptions weren't phased out for two additional years (for 2011 and 2012) when AGI exceeds an inflation-adjusted threshold. New law. For tax years beginning after 2012, the Personal Exemption Phaseout (PEP), 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 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Under the phaseout, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer's AGI exceeds the applicable threshold. These dollar amounts are inflation-adjusted for tax years after 2013. (Code Sec. 151(d), as amended by Act Sec. 101(b)(2)) ¶ 703. EGTRRA changes to student loan deduction rules are made permanent Code Sec. 221, 2012 Taxpayer Relief Act §101(a)(1) Code Sec. 221(b)(2)(B), 2012 Taxpayer Relief Act §101(a)(1) Code Sec. 221(f), 2012 Taxpayer Relief Act §101(a)(1) Generally effective: Tax years beginning after Dec. 31, 2012Committee Reports, NoneIndividuals can deduct a maximum of $2,500 annually for interest paid on qualified higher education loans (as defined in FTC 2d/Fin ¶K-5504; USTR ¶2214.02; TaxDesk ¶314,110; ). The deduction is claimed as an adjustment to gross income to arrive at adjusted gross income (AGI). For tax years beginning in 2012, the deduction phases out ratably for taxpayers with modified AGI (as defined in FTC 2d/Fin ¶K-5502.1; USTR ¶2214.01; TaxDesk ¶314,106; ) between $60,000 and $75,000 ($120,000 and $150,000 for joint returns). The phaseout amounts and ranges are indexed for inflation. See FTC 2d/Fin ¶K-5500; et seq. USTR ¶2214; et seq. TaxDesk ¶314,100; et seq. 2001 EGTRRA changes. Sec. 412 of 2001 Economic Growth and Tax Relief Reconciliation Act (2001 EGTRRA, Sec. 412, PL 107-16, 6/7/2001 ) amended the rules for deducting interest on student loans, effective generally for tax years beginning after 2001, by: (1) eliminating the 60-month limit on the deduction for interest paid on a qualified education loan FTC 2d/Fin ¶K-5500; FTC 2d/Fin ¶K-5501; USTR ¶2214; , and (2) increasing the pre-2001 EGTRRA AGI phaseout ranges ($40,000 to $55,000 for taxpayers other than joint filers; $60,000 to $75,000 for a married couple filing jointly) applicable to the student loan interest deduction. The phaseout ranges, as amended by 2001 EGTRRA, were indexed for inflation. FTC 2d/Fin ¶K-5502; USTR ¶2214; TaxDesk ¶314,105; Sunset after 2012. Under pre-2012 Taxpayer Relief Act law, a sunset provision in 2001 EGTRRA §901 (Sec. 901(a)(1), PL 107-16, 6/7/2001 ) as amended by 2010 Tax Relief Act §101(a)(1) (Sec. 101(a)(1), PL 111-312, 12/17/2010 ) provided that all changes made by 2001 EGTRRA didn't apply to tax years beginning after Dec. 31, 2012. FTC 2d/Fin ¶T-11051; USTR ¶79,006.86; TaxDesk ¶880,011; New Law. The 2012 Taxpayer Relief Act repeals title IX of EGTRRA (i.e., the title containing the above-described EGTRRA sunset). (EGTRRA § 901 (Sec. 901, PL 107-16, 6/7/2001 ) repealed by 2012 Taxpayer Relief Act §101(a)(1))RIA observation: In other words, the 2012 Taxpayer Relief Act repeals the 2001 EGTRRA sunset as it applies to the student loan interest deduction and makes permanent the provisions of the student loan deduction that were added by 2001 EGTRRA. Thus, for tax years beginning after 2012, the 60-month limitation on the student loan interest deduction will not apply. Also, for tax years beginning after 2012, the AGI phaseout ranges will not revert to the AGI phaseout ranges that applied before 2001 EGTRRA.Effective: Tax years beginning after Dec. 31, 2012. (2012 Taxpayer Relief Act §101(a)(3))
  • Reduced Capital Gains & Qualified Dividends Rate Except for Higher-Income TaxpayersUnder Sec. 303 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, P.L. 108-27), as modified by Sec. 102 of P.L. 109-222, favorable tax treatment is provided for long-term capital gain and qualified dividends. However, JGTRRA provided that this treatment ended after 2010.Capital gain. For tax years beginning in 2010, for both regular tax and alternative minimum tax (AMT) purposes, the maximum rate of tax on the adjusted net capital gain of an individual is 15%. If the adjusted net capital gain would otherwise be taxed at a rate below 25% if it were ordinary income, it is taxed at a 0% rate. That part of net capital gain attributable to unrecaptured section 1250 gain (i.e., gain attributable to real estate depreciation) is taxed at a maximum rate of 25%. Net capital gain attributable to collectibles gain and section 1202 gain is taxed at a maximum rate of 28%. The 2010 Tax Relief Act provided that net capital gain was to be taxed at a maximum rate of 0/15% for two additional years, through 2012. A qualified dividend paid to individuals was taxed at the same rates as adjusted net capital gain through 2012. Thus, under pre-2012 Taxpayer Relief Act law, for tax years beginning after Dec. 31, 2012, the maximum rate of tax on an individual's adjusted net capital gain was to be 20%. Any adjusted net capital gain which otherwise would be taxed at the 15% rate was to be taxed at a 10% rate. In addition, any gain from the sale or exchange of property held more than five years that would otherwise have been taxed at the 10% capital gain rate would be taxed at an 8% rate. Any gain from the sale or exchange of property acquired after 2000 and held for more than five years, that would otherwise have been taxed at a 20% rate was to be taxed at an 18% rate. Net capital gain attributable to unrecaptured section 1250 gain was to continue to be taxed a maximum rate of 25%. Net capital gain attributable to collectibles gain and section 1202 gain was to continue to be taxed at a maximum rate of 28%.Qualified dividend income. For tax years beginning in 2010, for both the regular tax and AMT purposes, an individual's qualified dividend income was taxed at the same rates that apply to net capital gain. Thus, an individual's qualified dividend income was taxed at a 15% and (for qualified dividend income which otherwise would be taxed at a 10% or 15% rate if the special rates did not apply) at a zero rate. The amount of a taxpayer's unrecaptured Code Sec. 1250 gain taxed at a maximum 25% rate is limited to the taxpayer's net capital gain determined without regard to the taxpayer's qualified dividend income. (In addition, a taxpayer must hold stock for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date in order for dividends on the stock to qualify as qualified dividend income.) The 2010 Tax Relief Act extended for two years, through 2012, the rules excluding qualified dividend income from net capital gain in computing unrecaptured Code Sec. 1250 gain taxed at a 25% rate; and the holding period rule for determining when dividends on stock qualify as qualified dividend income.Thus, under pre-2012 Taxpayer Relief Act law, for tax years beginning after Dec. 31, 2012, dividends received by an individual were to be taxed at ordinary income tax rates. The rules excluding qualified dividend income from net capital gain in computing unrecaptured Code Sec. 1250 gain taxed at a 25% rate, and the holding period rule for determining when dividends on stock qualify as qualified dividend income were to expire for tax years beginning after Dec. 31, 2012. New law. For tax years beginning after 2012, the 2012 Taxpayer Relief Act eliminates the provision in JGTRRA that provides for its provisions to sunset. Accordingly the provisions in JGTRRA are made permanent and no longer automatically sunset in future years. (Sec. 303 of JGTRRA, as amended by Act Sec. 102(a)) For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). (Code Sec. 1(h)(1), as amended by Act Sec. 102(b)) When accounting for Code Sec. 1411's 3.8% surtax on investment-type income and gains for tax years beginning after 2012, the overall rate for higher-income taxpayers will be 23.8%. For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will permanently be subject to a 0% rate. (Code Sec. 1(h)(1)(B), as amended by Act Sec. 102(c)(2)) Taxpayers who are subject to a 25%-or-greater rate on ordinary income, but whose income levels fall below the $400,000/$450,000 thresholds, will continue to be subject to a 15% rate on capital gains and dividends. The rate will be 18.8% for those subject to the 3.8% surtax (i.e, those with modified adjusted gross income (MAGI) over $250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). No 3%/80% Limitation on Itemized Deductions Except for Higher-Income TaxpayersUnless he elects to claim the standard deduction, a taxpayer is allowed to deduct his itemized deductions (generally those deductions which aren't allowed in computing adjusted gross income). For tax years beginning in 2010, there was no overall limitation on itemized deductions based on the taxpayer's adjusted gross income (AGI), although separate limitations (floors) might apply to the particular deduction. For tax years beginning after Dec. 31, 2010, the total amount of itemized deductions was to be reduced (the “Pease limitation”) by 3% of the amount by which the taxpayer's AGI exceeds a threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. However, the 2010 Tax Relief Act provided that the itemized deductions of higher-income taxpayers are not reduced for two additional years, through 2012. New law. For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the “Pease“ limitation on itemized deductions, 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 (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% of the amount by which the taxpayer's adjusted gross income (AGI) exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. These dollar amounts are inflation-adjusted for tax years after 2013. (Code Sec. 68(b), as amended by Act Sec. 101(b)(2))
  • AMT Exemption Permanently Increased With IndexingThe alternative minimum tax (AMT) is the excess, if any, of the tentative minimum tax for the year over the regular tax for the year. In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount (which phases out at higher income levels). The result is alternative minimum taxable income (AMTI), which is subject to an AMT rate of 26% or 28%. Under pre-Act law, the AMT exemption amounts for tax years beginning after 2011 were: $33,750 for unmarried individuals; $45,000 for married couples filing jointly and surviving spouses; and $22,500 for married individuals filing separately. New law. Retroactively effective for tax years beginning after 2011, the Act permanently increases the AMT exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. In addition, for tax years beginning after 2012, it indexes these exemption amounts for inflation. (Code Sec. 55(d), as amended by Act Sec. 104)
  • Background on Transfer Tax ChangesBefore enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16), there was no gift tax and no estate tax on the first $675,000 of combined transfers during life or at death for gifts made and individuals dying in 2001. These two taxes were tied together under a unified system having a top rate of 55%. However, there were differences between the gift tax and the estate tax. One difference potentially affected the income tax of donees (recipients) of gifts and heirs of estates. A donee generally gets the donor's basis (usually cost) for a gift. As a result of this carryover basis, if there is a gift of appreciated stock, for example, the donee will have a taxable gain if he sells at the gift value. Property acquired from a decedent, however, generally gets a basis equal to its value at his death (a “stepped-up basis”). This means that, on a later sale by the heir, he won't have to pay income tax on the appreciation in the property that occurred while it was held by the decedent.EGTRRA substantially increased the $675,000 exemption in stages after 2001. For individuals dying in 2006 through 2008, the exemption was $2 million. It rose to $3.5 million for individuals dying in 2009. EGTRRA also changed the unified system so that the gift tax exemption amount remained at $1 million for all years after 2001. Under EGTRRA, the top estate and gift tax rate was reduced in stages. It was 45% for transfers in 2007 through 2009. In 2010, there was to be no estate tax and the top gift tax rate was to be 35%. The top estate and gift tax rate was to revert to 55% in 2011.For 2010, the basis rules for inherited property were to be similar to the gift tax rules, but with many opportunities for heirs to get increases in basis. EGTRRA made other changes to the transfer tax rules. For example, it repealed the State death tax credit and replaced it with a deduction. EGTRRA also repealed the qualified family-owned business deduction and made modifications to the rules regarding (1) qualified conservation easements, (2) installment payment of estate taxes, and (3) various technical aspects of the GST tax.All of the EGTRRA changes were scheduled to sunset at the end of 2010. Under the sunset, the rates and rules were to revert to those that applied pre-EGTRRA. However, the 2010 Tax Relief Act provided temporary relief from the EGTRRA sunset. Among other changes, it reduced estate, gift and GST taxes for 2011 and 2012 and continued other estate and gift tax relief provisions that were set to expire after 2010. It preserved estate tax repeal for 2010 in a roundabout way: estates wanting zero estate tax for 2010 had to elect that option, along with the modified carryover basis rules. Otherwise, by default, the estate tax was revived for 2010, with a $5 million exemption, a top tax rate of 35%, and a step-up in basis. The 2010 Tax Relief Act also introduced a new portability election for estates of decedents dying after 2010 under which a deceased spouse's unused exemption could be shifted to the surviving spouse. However, these generous rules were temporary—the much harsher pre-EGTRRA rules were slated to return after 2012. Now that won't happen as the 2012 Taxpayer Relief Act has provided permanent transfer tax relief by ending the EGTRRA sunset and permanently adopting the changes made by the 2012 Taxpayer Relief Act. (Act Sec. 101(a))New Permanent Indexed ExemptionThe 2012 Tax Relief Act permanently establishes the estate exemption amount (technically, the basic exclusion amount) at $5 million per person (as increased by indexing after 2011). (Code Sec. 2010(c), as amended by Act Sec. 101(a) (the provision eliminating the EGTRRA and 2010 Tax Relief Act sunsets)) Indexing increased the exemption to $5,120,000 for 2012. Based on inflation data, RIA calculates the exemption to be $5,250,000 for gifts made and decedents dying in 2013. The exemption is allowed in the form of a unified credit. (Code Sec. 2010)Maximum Transfer Tax Rates Raised Slightly from 2012 LevelsThe maximum estate and gift tax rate was 35% for gifts made and decedents dying in 2012. The 2012 Taxpayer Relief Act changes the top rate to 40% for gifts made and decedents dying after 2012. Under the Act, transfers over $500,000 are taxed at 37%, transfers over $750,000 are taxed at 39% and transfers over $1,000,000 are taxed at 40%. More specifically, the tax on a transfer over $1 million is $345,800 plus 40% of the excess over $1,000,000. (Code Sec. 2001(c), Code Sec. 2502(a), and Code Sec. 2641, as amended by Act Sec. 101) Thus, the $5,250,000 exemption for 2013 (that RIA has calculated based on inflation data) or, in technical terms, the basic exclusion amount for 2013, would offset $2,045,800 in tax ($345,800 + (.40 × $4,250,000)). In other words, based on RIA calculations, the unified credit for 2013 transfers is $2,045,800.2010 Tax Relief Act Gift Tax Changes Made Permanent with ModificationsUnder the 2010 Tax Relief Act, for gifts made in 2010, the exemption was $1 million and the gift tax rate was 35%. For gifts made after Dec. 31, 2010, the gift tax was reunified with the estate tax, with an exemption amount of $5 million (plus indexing after 2011) and a top rate of 35%. The exemption under the unified system covering lifetime transfers and transfers at death was allowed through a unified credit contained in Code Sec. 2010 (for estate tax purposes) and Code Sec. 2505 (for gift tax purposes). The 2010 Tax Relief Act also made clarifying changes to how gift taxes are taken into account in the mechanism for computing estate and gift taxes. All of these changes have now been made permanent by the 2012 Taxpayer Relief Act, except that the Act has changed the top gift tax rate to 40%. (Code Sec. 2001(b)(2), Code Sec. 2001(g), Code Sec. 2502(a) and Code Sec. 2505, as amended by Act Sec. 101)) RIA observation: Based on inflation data, RIA has calculated the exemption to be $5,250,000 and unified credit to be $2,045,800 for 2013 transfers. Generation-Skipping Transfer Tax ChangesThe 2010 Tax Relief Act made the GST tax exemption for decedents dying or gifts made after Dec. 31, 2010 and before Jan. 1, 2013 equal to the basic exclusion amount for estate tax purposes (e.g., $5 million, as indexed), set the GST tax rate for transfers made in 2011 and 2012 at 35%, and extended the EGTRRA modifications to the rules regarding various technical aspects of the GST tax. The 2012 Taxpayer Relief Act makes these changes permanent, except that it increases the GST tax rate to 40%. In other words, under the 2012 Taxpayer Relief Act, for decedents dying and gifts made after 2012, (1) the GST tax exemption is equal to the basic exclusion amount of $5 million as indexed, which RIA has calculated to be $5,250,000 for 2013; (2) the GST tax rate is 40%; and (3) the technical modifications to the GST rules made by EGTRRA continue to apply. Portability of Unused Exemption between Spouses Made PermanentThe 2010 Tax Relief Act authorized estates of decedents dying after 2010 and before 2013 to elect to transfer any unused exclusion to the surviving spouse. The amount received by the surviving spouse is called the deceased spousal unused exclusion, or DSUE, amount. If the executor of the decedent's estate elects transfer, or portability, of the DSUE amount, the surviving spouse can apply the DSUE amount received from the estate of his or her last deceased spouse against any tax liability arising from subsequent lifetime gifts and transfers at death. The 2012 Taxpayer Relief Act has made this provision permanent. (Code Sec. 2010(c)(2)(B), Code Sec. 2010(c)(2)(4), and Code Sec. 2010(c)(5), as amended by Act Sec. 101) In addition, it has made a retroactive technical correction to Code Sec. 2010(c)(4)(B), which IRS had already implemented under regs, which greatly flesh out the statutory rules. For detailed discussion of those regs, see Weekly Alert ¶  2  06/21/2012.Other EGTRRA Changes Now PermanentAs noted above, in addition to reducing transfer taxes, EGTRRA made a number of other transfer tax changes. For example, it repealed the State death tax credit and replaced it with a deduction. EGTRRA also repealed the qualified family-owned business deduction and made modifications to the rules regarding (1) qualified conservation easements, (2) installment payment of estate taxes, and (3) various technical aspects of the GST tax. The 2012 Taxpayer Relief Act has now made all of these changes permanent. (Act Sec. 101)
  • ¶ 702. Qualified tuition deduction is retroactively extended through 2013Code Sec. 222(e), as amended by 2012 Taxpayer Relief Act §207(a)Generally effective: Tax years beginning after Dec. 31, 2011 and before Jan. 1, 2014Committee Reports, NoneAn individual is allowed an above-the-line deduction for “qualified tuition and related (QT&R) expenses” for higher education paid by the individual during the tax year. These expenses include tuition and fees for the enrollment or attendance of the taxpayer, the taxpayer's spouse, or any dependent for whom the taxpayer can claim a personal exemption, at an eligible institution of higher education for courses of instruction at the institution. Theses expenses must be in connection with enrollment at an institution of higher education during the tax year, or with an academic term beginning during the tax year or during the first three months of the next tax year. The amount of theses expenses must be reduced by tax-free educational assistance and certain exclusions from income under the rules for savings bond interest, Coverdell education savings accounts (ESAs), and qualified tuition programs (QTPs or 529 plans). (See FTC 2d/Fin ¶A-4470; et seq. USTR ¶2224; et seq. TaxDesk ¶352,000; et seq.)The maximum deduction is: ... $4,000 for an individual whose adjusted gross income (AGI), with certain modifications, doesn't exceed $65,000 ($130,000 for a joint return), ... $2,000 for an individual whose modified AGI exceeds $65,000 ($130,000 for a joint return), but doesn't exceed $80,000 ($160,000 for a joint return), or ... zero for other taxpayers. (See FTC 2d/Fin ¶A-4471; USTR ¶2224; TaxDesk ¶352,001; ).Under pre-2012 Taxpayer Relief Act law, the higher-education expense deduction wasn't available for tax years beginning after Dec. 31, 2011. FTC 2d/Fin ¶A-4470; FTC 2d/Fin ¶A-4471; USTR ¶2224; USTR ¶2224.01; TaxDesk ¶352,000; TaxDesk ¶352,001; New Law. The 2012 Taxpayer Relief Act (Act) replaces “Dec. 31, 2011” with “Dec. 31, 2013.” Thus, the Act extends the qualified tuition deduction for two years so that it's generally available for tax years beginning before Jan. 1, 2014. (Code Sec. 222(e) as amended by 2012 Taxpayer Relief Act §207(a)) RIA observation: Most individuals are on a calendar year. For these individuals, the qualified tuition expenses must be paid before 2014. But, as noted above, the deduction is for expenses in connection with enrollment at an institution of higher education during the tax year, or with an academic term beginning during the tax year or during the first three months of the next tax year. Thus, expenses for an academic term beginning as late as Mar. 31, 2014 may qualify for the deduction, if the taxpayer pays these expenses before 2014.RIA recommendation: A taxpayer who plans to go to college or graduate school for an academic term beginning in January, February, or March of 2014 (or whose spouse or dependent plans to do so) should consider paying some tuition for that term at the end of 2013—namely, the dollar amount equal to the maximum allowable deduction ($4,000 or $2,000, depending on the taxpayer's modified AGI).Effective: Tax years beginning after Dec. 31, 2011 (2012 Taxpayer Relief Act §207(b)) and before Jan. 1, 2014. (Code Sec. 222(e) )
  • State and Local Sales Tax Deduction Reinstated and ExtendedTaxpayers who itemize deductions may elect to deduct state and local general sales and use taxes instead of state and local income taxes. Under pre-Act law, this choice was unavailable for tax years beginning after 2011. New law. The 2012 Taxpayer Relief Act retroactively extends this provision for two years so that itemizers can elect to deduct state and local sales and use taxes instead of state and local income taxes for tax years beginning before Jan. 1, 2014. (Code Sec. 164(b)(5)(I), as amended by Act Sec. 205) Above-the-Line Deduction for Educator Expenses Reinstated and ExtendedEligible elementary and secondary school teachers may claim an above-the-line deduction for up to $250 per year of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom. Under pre-Act law, the educator expense deduction didn't apply for tax years beginning after 2011. New law. The 2012 Taxpayer Relief Act retroactively extends the educator expense deduction for two years so that it applies to expenses paid in incurred in tax years 2012 and 2013. (Code Sec. 62(a)(2)(D), as amended by Act Sec. 201) Exclusion for Discharged Home Mortgage Debt ExtendedDischarge of indebtedness income from qualified principal residence debt, up to a $2 million limit ($1 million for married individuals filing separately) is excluded from gross income. Under pre-Act law, this exclusion didn't apply to any debt discharged after 2012. New law. The 2012 Taxpayer Relief Act extends this exclusion for one year so that it applies to home mortgage debt discharged before 2014. (Code Sec. 108(a)(1)(E), as amended by Act Sec. 202) ¶ 306. Exclusion for debt discharge income from home mortgage forgiveness is extended for one year until the end of 2013 Code Sec. 108(a)(1)(E), as amended by 2012 Taxpayer Relief Act §202(a)Generally effective: Discharges of indebtedness after Dec. 31, 2012, and before Jan. 1, 2014 Committee Reports, NoneThe rule that a discharge of indebtedness gives rise to income includible in gross income—“cancellation of debt (COD) income” or “debt discharge income” ( FTC 2d/Fin ¶J-7001; USTR ¶614.114; TaxDesk ¶186,001; ) is subject to certain exceptions, including exceptions for discharges in Title 11 bankruptcy cases or when the taxpayer is insolvent (the “insolvency exclusion”). For these exceptions, taxpayers generally reduce certain tax attributes, including basis in property, by the amount of the debt discharged. ( FTC 2d/Fin ¶J-7401; USTR ¶1084.01; TaxDesk ¶188,011; )An exception for home mortgages—the “mortgage forgiveness exclusion”—applies to discharges after Dec. 31, 2006. Any debt discharge income resulting from a discharge (in whole or in part) of “qualified principal residence indebtedness” is excluded from gross income. “Qualified principal residence indebtedness” is acquisition indebtedness (as defined by Code Sec. 163(h)(3)(B) except that the dollar limitation is $2 million) with respect to the taxpayer's principal residence—i.e., the debt must have been used to acquire, construct, or substantially improve the taxpayer's principal residence, or to refinance the debt (but only up to the amount refinanced), and must have been secured by the residence (see FTC 2d/Fin ¶K-5484; USTR ¶1634.052; TaxDesk ¶314,515; ). This exclusion applies where taxpayers restructure their acquisition debt on a principal residence or lose their principal residence in a foreclosure. ( FTC 2d/Fin ¶J-7417; USTR ¶1084.01; TaxDesk ¶188,029; )The basis of the residence is reduced by the amount excluded under the above-described mortgage forgiveness exclusion, but not below zero. ( FTC 2d/Fin ¶P-3006.2; USTR ¶1084.02; TaxDesk ¶215,004.1; )“Principal residence” has the same meaning for this purpose as under the Code Sec. 121 homesale exclusion rules—i.e., the home where the taxpayer ordinarily lives most of the time. The exclusion doesn't apply to debt forgiven on second homes, business property, or rental property. ( FTC 2d/Fin ¶J-7417; USTR ¶1084.01; TaxDesk ¶188,029; )If only part of the discharged loan is qualified principal residence indebtedness, the mortgage forgiveness exclusion applies only to so much of the amount discharged as exceeds the amount of the loan (as determined immediately before the discharge) that isn't qualified principal residence indebtedness. ( FTC 2d/Fin ¶J-7418; USTR ¶1084.01; TaxDesk ¶188,030; )The mortgage forgiveness exclusion doesn't apply if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the residence's value or to the taxpayer's financial condition. ( FTC 2d/Fin ¶J-7419; USTR ¶1084.01; TaxDesk ¶188,031; )The mortgage forgiveness exclusion also doesn't apply to a taxpayer in a Title 11 bankruptcy case; instead, the general exclusion rules apply. Where an insolvent taxpayer (other than one in a Title 11 bankruptcy) qualifies for the mortgage forgiveness exclusion, the mortgage forgiveness exclusion applies unless the taxpayer elects to apply the insolvency exclusion. ( FTC 2d/Fin ¶J-7420; USTR ¶1084.01; TaxDesk ¶188,012; )Under pre-2012 Taxpayer Relief Act law, the mortgage forgiveness exclusion applied to indebtedness discharged before Jan. 1, 2013. FTC 2d/Fin ¶J-7417; USTR ¶1084.01; TaxDesk ¶188,029; New Law. The 2012 Taxpayer Relief Act (Act) extends the mortgage forgiveness exclusion for one year, so that it applies to indebtedness discharged before Jan. 1, 2014. (Code Sec. 108(a)(1)(E) as amended by 2012 Taxpayer Relief Act §202(a)) RIA observation: As described above, an insolvent taxpayer (not in a Title 11 bankruptcy case) whose debt is discharged (in whole or in part) uses the mortgage forgiveness exclusion rules, including the basis reduction requirement for the residence, for any portion of the discharged debt that is “qualified real property indebtedness.” That is, if the taxpayer wants to use the insolvency exclusion rules, including the tax attribute reduction requirements, he must elect “out” of the mortgage forgiveness exclusion. By extending the mortgage forgiveness exclusion for one year, the Act also extends for one year the period for which an insolvent taxpayer must affirmatively elect to use the insolvency exclusion.Taxpayers usually won't benefit from electing the insolvency exclusion here. The insolvency exclusion requires the taxpayer to make the same basis and tax attribute reductions as are required in a Title 11 bankruptcy case (see FTC 2d/Fin ¶J-7404; USTR ¶1084.01; TaxDesk ¶188,016; ). The mortgage forgiveness exclusion requires the taxpayer to reduce his basis in the residence (see FTC 2d/Fin ¶P-3006.2; USTR ¶1084.02; TaxDesk ¶215,004.1; ). In addition, the amount of debt discharge income that is excluded from income under the insolvency exclusion is limited to the amount by which the taxpayer is insolvent (see FTC 2d/Fin ¶J-7403; USTR ¶1084.01; TaxDesk ¶188,014; ). This limitation doesn't apply in the case of the mortgage forgiveness exclusion (see FTC 2d/Fin ¶J-7417; USTR ¶1084.01; TaxDesk ¶188,029; ).RIA observation: Apart from providing the one-year extension, the Act doesn't make any changes to the rules for the mortgage forgiveness exclusion.Effective: Discharges of indebtedness after Dec. 31, 2012 (2012 Taxpayer Relief Act §202(b)), and before Jan. 1, 2014. (Code Sec. 108(a)(1)(E) )
  • Treatment of Mortgage Insurance Premiums as Deductible Qualified Residence Interest Reinstated and ExtendedMortgage insurance premiums paid or accrued by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer's qualified residence are treated as deductible qualified residence interest, subject to a phase-out based on the taxpayer's AGI. Under pre-Act law, this provision only applied to premiums paid or accrued before Jan. 1, 2012. New law. The 2012 Taxpayer Relief Act retroactively extends this provision for two years so that a taxpayer can deduct, as qualified residence interest, mortgage insurance premiums paid or accrued before Jan. 1, 2014. (Code Sec. 163(h)(3)(E), as amended by Act Sec. 204) Increase in Excludible Employer-Provided Mass Transit and Parking Benefits Reinstated and ExtendedFor 2011, an employee could exclude from gross income up to $230 per month in employer-provided mass transit and parking benefits. However, for 2012, the exclusion rose to $240 for parking due to an inflation adjustment, but it fell to $125 for employer-provided transit and vanpooling benefit, creating a disparity with other qualified transportation fringe benefits. Under pre-Act law, this disparity was scheduled to continue for post-2012 years, and mass transit and vanpool benefits extended to employees would only be excludable up to $125 per month. New law. The 2012 Taxpayer Relief Act retroactively extends this increase in the monthly exclusion for employer-provided transit and vanpool benefits, so that the exclusion for employer-provided transit and vanpool benefits is equal to that of the exclusion for employer-provided parking benefits, through 2013. (Code Sec. 132(f)(2), as amended by Act Sec. 203) RIA observation: As a result of indexing changes, the exclusion is $245 per month in 2013. RIA observation: It's unclear how a taxpayer could actually take advantage of these retroactively increased benefits for 2012. Presumably, this issue will be addressed in future IRS guidance. Liberalized Rules for Qualified Conservation Contributions Reinstated and ExtendedA taxpayer's aggregate qualified conservation contributions (i.e., contributions of appreciated real property for conservation purposes) are allowed up to the excess of 50% of the taxpayer's contribution base over the amount of all other allowable charitable contributions (100% for qualified farmers and ranchers), with a 15-year carryover of such contributions in excess of the applicable limitation. Under pre-Act law, these rules didn't apply to any contribution made in a tax year beginning after 2011, and contributions made thereafter were to be subject to the otherwise applicable 30% limit for capital gain property (50% limit for qualified farmers and ranchers). New law. The 2012 Taxpayer Relief Act retroactively extends for two years the 50% and 100% limitations on qualified conservation contributions of appreciated real property so that they apply to contributions made in tax years beginning before Jan. 1, 2014. (Code Sec. 170(b)(1)(E), as amended by Act Sec. 206)
  • ¶ 1102. Special rules are retroactively extended for qualified conservation easements contributed by individuals (including ranchers and farmers) before 2014Code Sec. 170(b)(1)(E)(vi), as amended by 2012 Taxpayer Relief Act §206(a)Generally effective: Contributions made in tax years beginning after Dec. 31, 2011 and before Jan. 1, 2014Committee Reports, NoneContributions by individuals of appreciated capital gain property to 50% charities are deductible up to 30% of the taxpayer's contribution base, unless the taxpayer elects to reduce the amount of the contribution, see FTC 2d/Fin ¶K-3686; USTR ¶1704.11; TaxDesk ¶333,013; . An individual's “contribution base” for a year is his adjusted gross income (AGI) for the year, but without deducting any net operating loss (NOL) carryback to that year, see FTC 2d/Fin ¶K-3672; USTR ¶1704.05; TaxDesk ¶333,002; .“Qualified conservation contributions” made by individuals in tax years beginning after Dec. 31, 2005 are deductible to the extent the aggregate of those contributions don't exceed the excess of 50% of the taxpayer's contribution base over the amount of all other allowable charitable contributions. FTC 2d/Fin ¶K-3501; FTC 2d/Fin ¶K-3694.1; USTR ¶1704.11; USTR ¶1704.45; TaxDesk ¶333,021.1; TaxDesk ¶331,625; If the individual is a qualified farmer or rancher for the tax year in which the qualified conservation contribution is made, the contribution is allowed to the extent the aggregate of those contributions don't exceed the excess of 100% (rather than 50%) of the taxpayer's contribution base over the amount of all other allowable charitable contributions. FTC 2d/Fin ¶K-3670; FTC 2d/Fin ¶K-3694.2; USTR ¶1704.11; TaxDesk ¶333,021.2; The excess of a taxpayer's (or a qualified farmer's or rancher's) qualified conservation contributions over the 50% (or 100%) limitation could be carried over for up to 15 years. FTC 2d/Fin ¶K-3701.1; FTC 2d/Fin ¶K-3670; USTR ¶1704.13; TaxDesk ¶333,302.2; This is in contrast to the general five-year carryover period that applies to an individual's charitable contributions in excess of the percentage ceilings for the year, see FTC 2d/Fin ¶K-3701; USTR ¶1704.13; TaxDesk ¶333,301; .Under pre-2012 Taxpayer Relief Act law, the above rules on qualified conservation contributions didn't apply to contributions made in tax years beginning after Dec. 31, 2011. FTC 2d/Fin ¶K-3670; FTC 2d/Fin ¶K-3694.1; FTC 2d/Fin ¶K-3694.2; FTC 2d/Fin ¶K-3701.1; USTR ¶1704.11; TaxDesk ¶333,021.1; TaxDesk ¶333,021.2; TaxDesk ¶333,302.2; New Law. The 2012 Taxpayer Relief Act replaces Dec. 31, 2011 with Dec. 31, 2013. (Code Sec. 170(b)(1)(E)(vi) as amended by 2012 Taxpayer Relief Act §206(a)) RIA observation: So, the 2012 Taxpayer Relief Act extends the above rules for two years for contributions made in tax years beginning before 2014.RIA observation: The 50% limitation (100% for qualified farmers and ranchers) and 15-year carryover continue to apply to qualified conservation contributions made by individuals in tax years beginning in 2012 and 2013.RIA illustration : In 2013, an individual with a contribution base of $100 makes a qualified conservation contribution of property with a fair market value of $80 and makes other charitable contributions subject to the 50% limitation of $60. The individual is allowed a deduction of $50 in 2013 for the non-conservation contributions (50% of the $100 contribution base) and is allowed to carry over the excess $10 for up to five years. No current deduction is allowed for the qualified conservation contribution, but the entire $80 qualified conservation contribution may be carried forward for up to 15 years.RIA observation: The retroactive extension of these special rules may be of limited use to most individuals for 2012 because, before the enactment of the 2012 Taxpayer Relief Act on Jan. 2, 2012, there had been considerable uncertainty about the chances of extending them.For the extension of incentives for qualified conservation contributions by corporate farmers and ranchers, see ¶1103 .Effective: Contributions made in tax years beginning after Dec. 31, 2011 (2012 Taxpayer Relief Act §206(c)) and before Jan. 1, 2014. (Code Sec. 170(b)(1)(E)(vi) )
  • ¶ 1101. Rule allowing tax-free IRA distributions of up to $100,000 if donated to charity, is retroactively extended through 2013Code Sec. 408(d)(8)(F), as amended by 2012 Taxpayer Relief Act §208(a)Generally effective: For IRA distributions made during 2012 and 2013Committee Reports, NoneThe IRA distribution rules allow for the tax-free treatment of distributions from IRAs where the distributions are donated to charity. Specifically, a taxpayer may exclude from gross income so much of the aggregate amount of his “qualified charitable distributions” not exceeding $100,000 in a tax year.A “qualified charitable distribution” is any otherwise taxable distribution from a traditional IRA or a Roth IRA that is: (1) made directly by the IRA trustee to a Code Sec. 170(b)(1)(A) charitable organization (other than a Code Sec. 509(a)(3) private foundation or a Code Sec. 4966(d)(2) donor advised fund); and (2) made on or after the date on which the individual for whose benefit the IRA is maintained (i.e., the IRA owner) has attained age 701/2. For purposes of the required minimum distribution (RMD) rules as they apply to individual retirement accounts and individual retirement annuities, qualified charitable distributions may be taken into account to the same extent that the distribution would have been taken into account under the RMD rules had the distribution not been directly distributed under the IRA qualified charitable distribution rules. Thus, an IRA owner who makes an IRA qualified charitable distribution in an amount equal to his RMD for the tax year is considered to have satisfied his minimum distribution requirement for that year, even though a charitable entity (and not the IRA owner) is the recipient of the distribution.Under pre-2012 Taxpayer Relief Act law, the tax-free qualified charitable distribution rules, above, only applied to distributions made in tax years beginning no later than Dec. 31, 2011 (the “termination date”). ( FTC 2d/Fin ¶H-12200; FTC 2d/Fin ¶H-12253.2; USTR ¶4084.03; TaxDesk ¶143,003.2; Pension Analysis ¶35,154.2; )New Law. Under the 2012 Taxpayer Relief Act, the termination date of the tax-free qualified charitable distribution rule is amended by substituting Dec. 31, 2013, for Dec. 31, 2011. (Code Sec. 408(d)(8)(F) as amended by 2012 Taxpayer Relief Act §208(a)) RIA observation: The Act extends the tax-free qualified charitable distribution rules for two years (through 2013), and thus the rules may be applied to IRA distributions made in tax years beginning after Dec. 31, 2011 and before Jan. 1, 2014.RIA observation: Thus, under the 2012 Act, taxpayers age 701/2 or older may exclude from gross income up to $100,000 of their qualified charitable distributions for each tax year beginning in 2012 and 2013 (in addition to any qualified charitable distributions they may have made through 2011).Special election for Dec. 2012 distributions.Under a special rule, for purposes of both (i) the tax-free qualified charitable distribution rules, and (ii) the RMD rules as they apply to IRAs, any portion of an IRA distribution made to the taxpayer after Nov. 30, 2012, and before Jan. 1, 2013 (i.e., during Dec. 2012), may be treated as a qualified charitable distribution, if the IRA owner so elects at such time and in such manner as IRS will prescribe, to the extent that the portion is: (i) transferred in cash after the distribution to an eligible charity before Feb. 1, 2013; and (ii) part of a distribution that would otherwise satisfy the tax-free qualified charitable distribution rules, but for the fact that the distribution was not transferred directly to an eligible charity. (2012 Taxpayer Relief Act §208(b)(2)(B)) RIA observation: Thus, the special election for Dec. 2012 distributions provides a limited exception to the general rule that charitable transfers must be made by the IRA trustee directly to an eligible charity.RIA illustration : Peter is an individual who is over age 701/2, and the owner of a traditional IRA. On Dec. 12, 2012, Peter received a $75,000 distribution from the IRA in satisfaction of his RMD for 2012.Under the special rule for Dec. 2012 distributions, Peter can elect to transfer to an eligible charity any amount of cash up to $75,000 (the amount of his 2012 RMD), and the amount transferred will be treated as a tax-free qualified charitable distribution, as long as Peter makes the charitable transfer no later than Jan. 31, 2013. Peter will still be considered to have satisfied his 2012 RMD regardless of the amount of the charitable transfer.Special election for Jan. 2013 distributions.Under another special rule, for purposes of both (i) the tax-free qualified charitable distribution rules, and (ii) the RMD rules as they apply to IRAs, any qualified charitable distribution made after Dec. 31, 2012, and before Feb. 1, 2013 (i.e., during Jan. 2013), will be deemed to have been made on Dec. 31, 2012, if the IRA owner so elects at such time and in such manner as IRS will prescribe. (2012 Taxpayer Relief Act §208(b)(2)(A)) RIA observation: Thus, at the taxpayer's election, a qualified charitable distribution made in Jan. 2013 is permitted to be treated as made in 2012, and thus permitted to (a) count against the 2012 $100,000 limitation on the exclusion, and (b) be used to satisfy the taxpayer's RMD for 2012.RIA observation: For purposes of the special election for Jan. 2013 distributions, the IRA distribution must be made by the IRA trustee directly to the eligible charity, unlike the exception to the direct transfer rule provided under the special election for Dec. 2012 distributions, above.RIA illustration : John is an individual who is over age 701/2, and the owner of a traditional IRA. During 2012, he did not take any distributions from the IRA, even though he was required to take a $100,000 minimum distribution for 2012. On Jan. 18, 2013, John directs the IRA trustee to make a $100,000 charitable transfer.Under the special rule for Jan. 2013 distributions, John can elect to treat the $100,000 charitable transfer as having been made on Dec. 31, 2012. If John makes the election (pursuant to rules that IRS is to prescribe), he will be (i) considered to have satisfied his minimum distribution requirement for 2012, and (ii) entitled to make another tax-free charitable transfer of up to $100,000 in 2013.Effective: For IRA distributions made in tax years beginning after Dec. 31, 2011 (2012 Taxpayer Relief Act §208(b)(1)), but not after Dec. 31, 2013. (Code Sec. 408(d)(8)(F) )
  • ¶ 701. American Opportunity Tax Credit (AOTC) for higher education expenses is extended five years, through 2017Code Sec. 25A(i), as amended by 2012 Taxpayer Relief Act §103(a)(1) Code Sec. None, 2012 Taxpayer Relief Act §103(a)(2) Generally effective: Tax years beginning after Dec. 31, 2012 and before Jan. 1, 2018Committee Reports, NoneBefore 2009. For tax years beginning before 2009, individual taxpayers could claim a nonrefundable personal credit—the Hope credit (a component credit of the “higher education credit,” along with the Lifetime Learning Credit)—against income tax of up to $1,800 (for 2008) per eligible student for qualified tuition and related (QT&R, see below) expenses paid for the first two years of the student's post-secondary education in a degree or certificate program. To claim the Hope credit, the student couldn't have completed the first two years of that post-secondary education before the beginning of the tax year for which the credit was claimed (i.e., the credit was allowed only for QT&R expenses paid for the first two years of the post-secondary education). FTC 2d/Fin ¶A-4500; FTC 2d/Fin ¶A-4501; FTC 2d/Fin ¶A-4530; USTR ¶25A4; USTR ¶25A4.03; USTR ¶25A4.04; TaxDesk ¶568,901; TaxDesk ¶568,930; The pre-2009 Hope credit equalled: (1) 100% of the first $1,200 (an inflation adjusted amount) of QT&R expenses, plus (2) 50% of the next $1,200 (an inflation-adjusted amount) of QT&R expenses paid, for education furnished to an eligible student in an academic period, for a total maximum Hope credit of $1,800. FTC 2d/Fin ¶A-4523; USTR ¶25A4.03; TaxDesk ¶568,923; And, for each eligible student, the Hope credit couldn't be claimed if the credit had been claimed for that student for any two earlier tax years. FTC 2d/Fin ¶A-4533; USTR ¶25A4.03; USTR ¶25A4.04; TaxDesk ¶528,933; Generally, QT&R expenses for the pre-2009 Hope credit included, with specific exceptions, tuition and fees (excluding nonacademic fees) required for the enrollment or attendance of the taxpayer, his spouse, or tax dependent, at a post-secondary educational institution eligible to participate in the federal student loan program. FTC 2d/Fin ¶A-4537; USTR ¶25A4.07; TaxDesk ¶568,937; An otherwise allowable Hope credit is phased out ratably for taxpayers with specified (inflation adjusted) modified adjusted gross income (MAGI) amounts. For 2008, the Hope credit was phased out between $48,000 and $58,000 ($96,000 and $116,000 for joint filers). FTC 2d/Fin ¶A-4517; USTR ¶25A4.02; TaxDesk ¶568,917; Under pre-2009 rules, the Hope credit was subject to the general Code Sec. 26 tax liability limitation on nonrefundable personal credits. FTC 2d/Fin ¶A-4901; FTC 2d/Fin ¶A-4902; USTR ¶264; TaxDesk ¶569,601; TaxDesk ¶569,602; For 2009 through 2012. The American Recovery and Reinvestment Act of 2009 (the “2009 Recovery Act,” Sec. 1004(a), PL 111-5, 2/17/2009 ) added Code Sec. 25A(i), which increased and expanded the Hope credit and renamed that modified credit the “American Opportunity tax credit” (AOTC). Specifically, the 2009 Recovery Act:increased the maximum credit amount to $2,500 per eligible student per year for qualified QT&R expenses. The AOTC equals the sum of (a) 100% of so much of the QT&R expenses paid by the taxpayer during the tax year (for education furnished to the eligible student during any academic period beginning in the tax year) as doesn't exceed $2,000, plus (b) 25% of the QT&R expenses so paid as exceeds $2,000 but doesn't exceed $4,000. FTC 2d/Fin ¶A-4523; USTR ¶25A4.03; TaxDesk ¶568,923; ;expanded the definition of QT&R expenses to include course materials FTC 2d/Fin ¶A-4537; USTR ¶25A4.07; TaxDesk ¶568,937; ;allowed the AOTC for the first four years of the student's post-secondary education in a degree or certificate program, if the student hasn't completed the first four years of post-secondary education before the beginning of the fourth tax year. And, for each eligible student, the AOTC can be claimed for four tax years. FTC 2d/Fin ¶A-4530; FTC 2d/Fin ¶A-4533; USTR ¶25A4.03; USTR ¶25A4.04; TaxDesk ¶568,930; TaxDesk ¶568,933; ;increased the MAGI range at which the credit is phased-out to between $80,000 and $90,000 ($160,000 and $180,000 for married joint filers) FTC 2d/Fin ¶A-4517; USTR ¶25A4.02; TaxDesk ¶568,917; ;applied a separate tax liability limitation permitting the AOTC credit to be claimed against alternative minimum tax (AMT) liability FTC 2d/Fin ¶A-4525.1; USTR ¶25A4; TaxDesk ¶568,925.1; ; andallowed 40% of the otherwise allowable AOTC to be refundable (unless the taxpayer claiming the credit was a child to whom the Code Sec. 1(g) “kiddie tax” rules apply for the tax year, i.e., generally, any child under age 18 or any child under age 24 who is a student providing less than one-half of his support, who has at least one living parent, and doesn't file a joint return). FTC 2d/Fin ¶A-4525.2; USTR ¶25A4.03; TaxDesk ¶568,925.2; The 2009 Recovery Act (Sec. 1004(c), PL 111-5, 2/17/2009 ) also included a special rule for bona fide residents of U.S. possessions. Under that rule, those individuals can't claim the refundable portion of the AOTC in the U.S. Instead, they claim the refundable portion of the credit in the possession in which they reside. But bona fide residents of non-mirror code possessions (for this purpose, Puerto Rico and American Samoa) can claim the refundable portion of the credit only if the possession establishes a plan for permitting the claim under its internal law. FTC 2d/Fin ¶A-4525.2; USTR ¶25A4.03; TaxDesk ¶568,925.2; Under pre-2012 Taxpayer Relief Act law, both (1) the Code Sec. 25A(i) AOTC, and (2) the 2009 Recovery Act § 1004(c)(1) special rule for bona fide residents of U.S. possessions, only applied for tax years beginning in 2009 through 2012. For tax years beginning after 2012, the pre-2009 Hope credit rules (described above) were to be applied again. FTC 2d/Fin ¶A-4523; USTR ¶25A4.03; TaxDesk ¶568,923; New Law. The 2012 Taxpayer Relief Act amends both (1) the Code Sec. 25A(i) AOTC, and (2) the 2009 Recovery Act § 1004(c)(1) special rule for bona fide residents of U.S. possessions, to provide that these rules apply for tax years beginning in 2013 through 2017, in addition to tax years beginning in 2009 through 2012. ( Code Sec. 25A(i) as amended by 2012 Taxpayer Relief Act §103(a)(1) ; and Sec. 1004(c)(1), PL 111-5, 2/17/2009 as amended by 2012 Taxpayer Relief Act §103(a)(2), respectively)RIA observation: Thus, the 2012 Taxpayer Relief Act extends for five years (through 2017) both the AOTC and the rules governing treatment of bona fide residents of U.S. possessions.RIA observation: Specifically, as a result of the above extension of the AOTC, for tax years beginning in 2013 through 2017 (for most individuals who are calendar year taxpayers, 2013 through 2017):the maximum AOTC credit amount is $2,500 per eligible student per year (computed as described above) for qualified QT&R expenses;QT&R expenses include tuition, fees, and course materials;the AOTC is allowed for each of the first four years of the student's post-secondary education in a degree or certificate program. And, for each eligible student, the AOTC can be claimed for four tax years;the AOTC is phased-out at MAGI between $80,000 and $90,000 (between $160,000 and $180,000 for joint filers);the AOTC can be claimed against AMT liability;40% of the otherwise allowable AOTC is refundable (unless the taxpayer claiming the credit is a child under age 18 or a child under age 24 who is a student providing less than one-half of his support, who has at least one living parent, and doesn't file a joint return); andbona fide residents of U.S. possessions can't claim the refundable portion of the AOTC credit in the U.S. Instead, they claim the refundable portion in the possession in which they reside (subject to the limitations described above).Effective: For tax years beginning after Dec. 31, 2012 (2012 Taxpayer Relief Act §103(e)(1)) and before Jan. 1, 2018 ( Code Sec. 25A(i) ; 2012 Taxpayer Relief Act §103(a)(2) )
  • ¶ 601. $1,000 per child amount and expanded refundability of child tax credit are permanently extended Code Sec. 24(a), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. 24(d)(1), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. 32(n), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. None, 2012 Taxpayer Relief Act §101(a)(1)Generally effective: Tax years beginning after Dec. 31, 2012.Committee Reports, NoneAn individual may claim a child tax credit (CTC) for each qualifying child under the age of 17. ( FTC 2d/Fin ¶A-4050; et seq. USTR ¶244; TaxDesk ¶569,100; et seq.) EGTRRA changes. Sec. 201 of the 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA, Sec. 201, PL 107-16, 6/7/2001 ) as amended by the 2003 Jobs and Growth Tax Relief Reconciliation Act (JGTRRA, Sec. 101(a), PL 108-27, 5/28/2003 ) and the 2004 Working Families Tax Relief Act (WFTRA, Sec. 101(a), PL 108-311, 10/4/2004 , Sec. 102(a), PL 108-311, 10/4/2004 ), modified the CTC as follows: (1) the per-child amount of the CTC was gradually increased to $1,000 (from $500). FTC 2d/Fin ¶A-4051; USTR ¶244; TaxDesk ¶569,100; (2) the CTC was made refundable for all taxpayers with qualifying children, regardless of the number of children, to the extent of 15% of the taxpayer's earned income in excess of a threshold amount (the “earned income formula”). The statutory threshold amount of $10,000 was indexed for inflation from 2001 (see ¶602 for use of $3,000 threshold). Families with three or more children were allowed to compute their refundable CTC using either (a) the earned income formula or (b) the formula available to them under pre-EGTRRA law—the excess, if any, of the taxpayer's social security taxes over the earned income credit (EIC) for the year. FTC 2d/Fin ¶A-4055; USTR ¶244.02; TaxDesk ¶569,100; (3) Code Sec. 32(n), which provided that a portion of the CTC was to be treated as a supplemental child credit amount added to the EIC otherwise allowable to the taxpayer, was eliminated. This supplemental child credit was subtracted from the taxpayer's other allowable credits, and had no impact on the total amount of credits allowed to the taxpayer. FTC 2d/Fin ¶A-4200; Sunset. Under Sec. 901 of EGTRRA, to which the applicable JGTRRA FTC 2d/Fin ¶T-11061; FTC 2d/Fin ¶T-11060; USTR ¶79,006.87; TaxDesk ¶880,013; and WFTRA FTC 2d/Fin ¶T-11070; FTC 2d/Fin ¶T-11071; USTR ¶79,006.88; TaxDesk ¶880,015; provisions were made subject, all of these changes were scheduled to expire after the EGTRRA sunset date. The pre-EGTRRA rules—i.e., the $500 per child CTC amount, the credit's refundability only for families with more than two qualifying children and only to the extent the taxpayer's social security taxes exceed the EIC, and the Code Sec. 32(n) supplemental child credit—were scheduled to come back into effect in tax years beginning after the sunset date. FTC 2d/Fin ¶T-11050; FTC 2d/Fin ¶T-11051; USTR ¶79,006; TaxDesk ¶880,011; Under pre-2012 Taxpayer Relief Act law, the EGTRRA enhancements to the CTC were scheduled to sunset, and the pre-EGTRRA rules were to apply, for tax years beginning after Dec. 31, 2012. FTC 2d/Fin ¶A-4050; New Law. The 2012 Taxpayer Relief Act eliminates the EGTRRA sunset by striking Title IX of EGTRRA (i.e., Sec. 901, the sunset provision). Thus, the EGTRRA changes to the CTC that are listed at (1)–(3) are made permanent. (Sec. 901, PL 107-16, 6/7/2001 as amended by 2012 Taxpayer Relief Act §101(a)(1))RIA observation: As a result of the 2012 Taxpayer Relief Act's repeal of the EGTRRA sunset provision, for tax years after 2012 (see effective date below): ... the per-child amount of the CTC is $1,000. ... the CTC is refundable for all taxpayers with qualifying children, regardless of the number of children, to the extent of 15% of the taxpayer's earned income in excess of a threshold amount (see ¶602 ). ... Code Sec. 32(n), which provided that a portion of the CTC was to be treated as a supplemental child credit amount added to the taxpayer's EIC, is permanently eliminated. For the extension through 2017 of the $3,000 threshold used to determine the refundable portion of the credit, see ¶602 .Effective: For tax years beginning after Dec. 31, 2012. (2012 Taxpayer Relief Act §101(a)(3)) ¶ 605. EIC simplification made permanentCode Sec. 32(a)(2)(B), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. 32(c)(1)(C), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. 32(c)(2)(A)(i), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. 32(c), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. 32(h), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. None, 2012 Taxpayer Relief Act §101(a)(1)Generally effective: Tax years beginning after Dec. 31, 2012Committee Reports, NoneCertain low- and moderate-income workers are allowed a refundable credit, the “earned income credit” (EIC). FTC 2d/Fin ¶A-4200; FTC 2d/Fin ¶A-4201; USTR ¶324.01; TaxDesk ¶569,001; Eligibility for the EIC is based, in part, on earned income, adjusted gross income, filing status, and number of qualifying children. The amount of the EIC is based on the presence and number of qualifying children in the taxpayer's family, as well as on adjusted gross income (AGI) and earned income. FTC 2d/Fin ¶A-4201; FTC 2d/Fin ¶A-4202; FTC 2d/Fin ¶A-4203; FTC 2d/Fin ¶A-4209; FTC 2d/Fin ¶A-4211; FTC 2d/Fin ¶A-4212; FTC 2d/Fin ¶A-4216; FTC 2d/Fin ¶A-4222; USTR ¶324.01; USTR ¶324.02; USTR ¶324.05; TaxDesk ¶569,001; TaxDesk ¶569,003; TaxDesk ¶569,009; TaxDesk ¶569,010; TaxDesk ¶569,011; TaxDesk ¶569,012; TaxDesk ¶569,023; The EIC is computed (subject to a phaseout, discussed below) by multiplying a credit percentage by the taxpayer's earned income. FTC 2d/Fin ¶A-4201; USTR ¶324.01; TaxDesk ¶569,001; The EIC generally equals a specified percentage of earned income up to a maximum dollar amount. The maximum amount applies over a certain income range and then diminishes to zero over a specified phaseout range. For taxpayers with earned income (or AGI, if greater) in excess of the beginning of the phaseout range, the maximum EIC amount is reduced by the phaseout rate multiplied by the amount of earned income (or AGI, if greater) in excess of the beginning of the phaseout range. For taxpayers with earned income (or AGI, if greater) in excess of the end of the phaseout range, no credit is allowed. FTC 2d/Fin ¶A-4201; FTC 2d/Fin ¶A-4202; USTR ¶324.01; TaxDesk ¶569,001; TaxDesk ¶569,002; EGTRRA/JGTRRA/WFTRA changes. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA,” Sec. 303, PL 107-16, 6/7/2001 ), the Jobs and Growth Tax Relief Reconciliation Act (“JGTRRA,” PL 108-27, 5/28/2003 ), and the Working Families Tax Relief Act of 2004 (“WFTRA,” PL 108-311, 10/4/2004 ), the EIC rules were simplified as follows: ... the definition of earned income was modified to include only amounts that are includible in gross income for the tax year. So, the definition includes wages, salaries, tips and other employee compensation, if includible in gross income for the tax year, plus net earnings from self-employment. FTC 2d/Fin ¶A-4200; FTC 2d/Fin ¶A-4222; USTR ¶324.05; TaxDesk ¶569,023; ; ... reduction of the EIC for taxpayers subject to the alternative minimum tax (AMT) was eliminated. FTC 2d/Fin ¶A-4201; USTR ¶324.01; ; ... adjusted gross income (AGI) replaced modified adjusted gross income (MAGI) in the phaseout computation rule, i.e., phaseout was made to apply if the taxpayer's AGI, or earned income, if greater, exceeded the phaseout amount. FTC 2d/Fin ¶A-4202; FTC 2d/Fin ¶A-4203; USTR ¶324.01; TaxDesk ¶569,003; ; ... the relationship test was changed to provide that a qualifying child (including a foster child) must reside with the taxpayer for more than six months; descendants of stepchildren were added to the eligible child category; and a brother, sister, stepbrother or stepsister of the taxpayer were reclassified under the general eligible child category, if the taxpayer cared for them as his own. FTC 2d/Fin ¶A-4211; FTC 2d/Fin ¶A-4212; USTR ¶324.02; TaxDesk ¶569,011; TaxDesk ¶569,012; ; and ... the tie-breaking rule were simplified for cases where an individual would be a qualifying child with respect to more than one taxpayer, and more than one taxpayer claimed the EIC with respect to that child. FTC 2d/Fin ¶A-4216; USTR ¶324.02; TaxDesk ¶569,016; Sunset. Under Sec. 901 of EGTRRA (Sec. 901, PL 107-16, 6/7/2001 ), to which the applicable JGTRRA (Sec. 107, PL 108-27, 5/28/2003 ) and WFTRA (Sec. 105, PL 108-311, 10/4/2004 ) provisions were made subject, all of the EGTRRA/JGTRRA/WFTRA changes described above were scheduled to expire for tax years beginning after Dec. 31, 2010 ( FTC 2d/Fin ¶T-11051; USTR ¶79,006.86; TaxDesk ¶880,011; ), and the pre-EGTRRA EIC rules were scheduled to come back into effect. ( FTC 2d/Fin ¶A-4202; )However, the 2010 Tax Relief Act (Sec. 101(a)(1), PL 111-312, 12/17/2010 ) provided that the EGTRRA sunset would not take effect until after Dec. 31, 2012 (instead of after Dec. 31, 2010), thus extending the EIC simplification rules (above) for two years.New Law. The 2012 Taxpayer Relief Act makes the EIC simplification rules “permanent” (i.e., the rules remain in force until Congress changes them) by eliminating the EGTRRA sunset provision in its entirety. (2012 Taxpayer Relief Act §101(a)(1))RIA observation: Thus, the EIC simplification rules discussed above are permanently extended, and continue in force without being subject to sunset provisions.Effective: Tax years beginning after Dec. 31, 2012. (2012 Taxpayer Relief Act §101(a)(3)) ¶ 606. $5,000 increase in EIC phaseout threshold for joint filers is extended through 2017Code Sec. 32(b)(2), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. 32(j), 2012 Taxpayer Relief Act §101(a)(1)Code Sec. 32(b)(3), 2012 Taxpayer Relief Act §103(c)(2)Code Sec. None, 2012 Taxpayer Relief Act §101(a)(1)Generally effective: Tax years beginning after Dec. 31, 2012Committee Reports, NoneCertain low-income workers are allowed a refundable credit, the earned income credit (EIC), described in detail at ¶605 . The credit is computed by multiplying the credit percentage by the individual's earned income up to an earned income amount (as adjusted for inflation). The credit percentage and the earned income amount, and therefore the maximum EIC, depend on the number of “qualifying children” the taxpayer has. FTC 2d/Fin ¶A-4200; FTC 2d/Fin ¶A-4201; USTR ¶324.01; TaxDesk ¶569,001; The EIC is phased out for taxpayers whose earned income, or adjusted gross income (AGI), if greater, exceeds a phaseout amount. For joint filers, the EIC is calculated based on the couple's combined income. FTC 2d/Fin ¶A-4202; USTR ¶324.01; TaxDesk ¶569,002; EGTRRA/ARRA changes. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, Sec. 303, PL 107-16, 6/7/2001 ) increased the EIC phaseout threshold amount for joint filers to equal $3,000 more than the amount for other filers, and provided for inflation adjustment of that $3,000 amount.The American Recovery and Reinvestment Act of 2009 (“ARRA,” Sec. 1002(a), PL 111-5, 2/17/2009 ) provided for tax years 2009 and 2010 only, that the EIC phaseout threshold for joint filers was to be increased to equal $5,000 more than the threshold amount for other filers (as adjusted for inflation). FTC 2d/Fin ¶A-4202; USTR ¶324.01; TaxDesk ¶569,002; EGTRRA Sunset/ARRA change expiration. Under section 901 of EGTRRA (Sec. 901, PL 107-16, 6/7/2001 ), the $3,000 increased phaseout amount for joint filers was scheduled to expire for tax years beginning after Dec. 31, 2010. In addition, the $5,000 increase in the phaseout amount under ARRA was also set to expire. The 2010 Taxpayer Relief Act (i) extended the EGTRRA sunset provision to tax years beginning after Dec. 31, 2012, and (ii) modified the EIC rules themselves to provide that the $5,000 (as adjusted for inflation) increase of the phaseout thresholds for joint filers also applies for tax years 2011 and 2012. ( FTC 2d/Fin ¶T-11051; USTR ¶79,006.86; TaxDesk ¶880,011; )For tax years beginning after Dec. 31, 2012, the same phaseout threshold amount was scheduled to apply for all filers. That is, neither the $3,000 nor the $5,000 increase would have been in effect.New Law. The 2012 Tax Relief Act permanently extends the EIC phaseout thresholds for joint filers. (2012 Taxpayer Relief Act §101(a)(1)) In addition, the Act extends the $5,000 increase of the phaseout thresholds for joint filers to any tax year beginning before 2018. (Code Sec. 32(b)(3) as amended by 2012 Taxpayer Relief Act §103(c)(2)) RIA observation: The $5,000 inflation-adjusted increase of the phaseout thresholds for joint filers will continue to apply through 2017 tax years. Following the 2017 tax year, the $3,000 increase provided in EGTRRA will apply.Effective: Tax years beginning after Dec. 31, 2012. ( 2012 Taxpayer Relief Act §101(a)(3); 2012 Taxpayer Relief Act §103(e)(1)) ¶ 607. Increased EIC for families with three or more qualifying children is extended for five yearsCode Sec. 32(b)(3), as amended by 2012 Taxpayer Relief Act §103(c)(2)Generally effective: Tax years beginning after Dec. 31, 2012 and before 2018Committee Reports, NoneCertain low-income workers are allowed a refundable earned income credit (EIC), computed (subject to certain limitations) by multiplying a credit percentage by the individual's earned income. The credit percentage depends on the number of “qualifying children” the taxpayer has. Before 2009, the credit percentages were: ... 7.65% for taxpayers with no qualifying children; ... 34% for taxpayers with one qualifying child; and ... 40% for taxpayers with two or more qualifying children. A temporary provision had increased the credit percentage for families with three or more qualifying children (from 40%) to 45% for tax years 2009 and 2010 only. For tax years after 2010, the pre-2009 40% credit percentage for families with two or more qualifying children was scheduled to again apply for families with three or more qualifying children.The 2010 Tax Relief Act extended the EIC at a rate of 45% for three or more qualifying children for two years (2011 and 2012). (Sec. 103(c), PL 111-312, 12/17/2010 ) FTC 2d/Fin ¶A-4200; FTC 2d/Fin ¶A-4201; USTR ¶324.01; TaxDesk ¶569,001; New Law. The 2012 Taxpayer Relief Act provides that the increased credit percentage of 45% for taxpayers with three or more qualifying children applies to any tax year beginning after 2008 and before 2018. (Code Sec. 32(b)(3) as amended by 2012 Taxpayer Relief Act §103(c)(2)) RIA observation: Thus, the 2012 Taxpayer Relief Act extends the EIC at a rate of 45% for three or more qualifying children for five years (2013 through 2017).Effective: Tax years beginning after Dec. 31, 2012 (2012 Taxpayer Relief Act §103(e)(1)) and before 2018 (Code Sec. 32(b)(3) ) .
  • Boosted Expensing Amounts for 2013Under Code Sec. 179, a taxpayer, other than an estate, a trust, or certain noncorporatelessors, can elect to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer's trade or business. The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of Code Sec. 179 property placed in service during the tax year in excess of a specified investment ceiling. Amounts ineligible for expensing due to excess investments in expensing-eligible property can't be carried forward and expensed in a subsequent year. Rather, they can only be recovered through depreciation. The amount eligible to be expensed for a tax year can't exceed the taxable income derived from the taxpayer's active conduct of a trade or business. And any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years. Under pre-Act law, the maximum amount that may be expensed for tax years beginning in 2011 is $500,000. For tax years beginning in 2012, the maximum amount is $139,000. For tax years beginning after 2012, the maximum amount is $25,000. For tax years beginning in 2011, the maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of section 179 property placed in service during the tax year in excess of $2,000,000 (the investment ceiling). For tax years beginning in 2012, the investment ceiling is $560,000. For tax years beginning after 2012, the investment ceiling is $200,000. In general, under pre-Act law, property is eligible for Code Sec. 179 expensing if it is: ... tangible property that's Code Sec. 1245 property (generally, machinery and equipment), depreciated under the MACRS rules of Code Sec. 168, regardless of its depreciation recovery period;... for any tax year beginning in 2010 or 2011, up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property); and... off-the-shelf computer software, but only if placed in service in a tax year beginning before 2013. (Code Sec. 179(d)(1))Under pre-Act law, for tax years beginning before 2013, an expensing election or specification of property to be expensed may be revoked without IRS's consent, but, if revoked, can't be re-elected. New law. Retroactively effective for tax years beginning in 2012, the 2012 Taxpayer Relief Act increases the maximum expensing amount under Code Sec. 179 from $139,000 to $500,000. Effective for tax years beginning in 2013, the 2012 Taxpayer Relief Act increases the maximum expensing amount under Code Sec. 179 from $25,000 to $500,000. The 2012 Taxpayer Relief Act also increases the investment-based phaseout amount for tax years beginning in 2012 or 2013 to $2,000,000. However, for tax years beginning after 2013, the maximum expensing amount is scheduled to drop to $25,000 and the investment-based phaseout amount is scheduled to drop to $200,000. (Code Sec. 179(b), as amended by Act Sec. 315(a)) RIA observation: The retroactive boost for tax years beginning in 2012 amounts to a windfall for eligible taxpayers that placed in service more than $139,000 of eligible property. The Act also provides that: ... Off-the-shelf computer software is expensing-eligible property if placed in service in a tax year beginning before 2014 (a one-year extension). (Code Sec. 179(d)(1)(A)(ii)... For tax years beginning before 2014 (also a one-year extension), an expensing election or specification of property to be expensed may be revoked without IRS's consent. But, if such an election is revoked, it can't be reelected. (Code Sec. 179(c)(2))... For any tax year beginning in 2010, 2011, 2012, or 2013 (a two-year extension) up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) is eligible for expensing under Code Sec. 179. (Code Sec. 179(f)(1))Bonus First-Year Depreciation Extended for One YearUnder pre-Act law, the Code Sec. 168(k) additional first-year depreciation deduction (also called bonus first-year depreciation) generally is allowed equal to 50% of the adjusted basis of qualified property acquired and placed in service after Dec. 31, 2011, and before Jan. 1, 2013 (before Jan. 1, 2014 for certain longer-lived and transportation property). The additional first-year depreciation deduction is allowed for both regular tax and alternative minimum tax (AMT) purposes, but is not allowed for purposes of computing earnings and profits. The basis of the property and the depreciation allowances in the year of purchase and later years are appropriately adjusted to reflect the additional first-year depreciation deduction. A taxpayer may elect out of additional first-year depreciation for any class of property for any tax year. In general, an asset qualifies for the bonus depreciation allowance if: ... It falls into one of the following categories: property to which the modified accelerated cost recovery system (MACRS) rules apply with a recovery period of 20 years or less; computer software other than computer software covered by Code Sec. 197; qualified leasehold improvement property; or certain water utility property.... It is placed in service before Jan. 1, 2013. (Certain long-production-period property and certain transportation property may be placed in service before Jan. 1, 2014)... Its original use commences with the taxpayer. Original use is the first use to which the property is put, whether or not that use corresponds to the taxpayer's use of the property.New law. The 2012 Taxpayer Relief Act extends 50% first-year bonus depreciation so that it applies to qualified property acquired and placed in service before Jan. 1, 2014 (before Jan. 1, 2015 for certain longer-lived and transportation property). (Code Sec. 168(k)(2), as amended by Act Sec. 331(a)) A conforming change is made to Code Sec. 460(c)(6)(B) (relating to 50% bonus depreciation not being taken into account as a cost in applying the percentage of completion method for certain long-term contracts). RIA observation: The 2012 Taxpayer Relief Act also retroactively revives and extends through 2013 the Code Sec. 168(e)(3)(E)(iv) rule treating qualified leasehold improvement property as 15-year property. See discussion below. Thus, such property is eligible for a bonus 50% first-year depreciation deduction if placed in service before Jan. 1, 2014. RIA observation: The 2012 Taxpayer Relief Act also extends through 2013 the Code Sec. 168(e)(3)(E)(v) rule treating qualified restaurant property as 15-year property and the Code Sec. 168(e)(3)(E)(ix) rule treating qualified retail improvement property as 15-year property. See discussion below. These types of property also are eligible for 50% bonus first-year depreciation under Code Sec. 168(k) if they also meet the definition of qualified leasehold improvement property. (See Weekly Alert ¶  3  01/26/2012 and Weekly Alert ¶  1  01/24/2011 for details.) Extended Choice to Forego Bonus Depreciation and Claim Credits InsteadPre-Act law's Code Sec. 168(k)(4), generally permits a corporation to increase the AMT credit limitation (but not the research credit limitation) by the bonus depreciation amount with respect to certain property placed in service after Dec. 31, 2010 and before Jan. 1, 2013 (Jan. 1, 2014 in the case of certain longer-lived and transportation property). New law. For property laced in service after Dec. 31, 2012, in tax years ending after that date, the 2012 Taxpayer Relief Act provides a similar option to corporations with respect to “round three extension property,” generally, property newly eligible for 50% bonus first year depreciation under the 2012 Taxpayer Relief Act's one-year extension provision, i.e., property placed in service after 2012 and before 2014 (before 2015 for the aircraft and long-production-period property). (Code Sec. 168(k)(4)(d) and Code Sec. 168(k)(4)(J) , as amended by Act Sec. 331(c))
  • First-Year Depreciation Cap for 2013 Autos and Trucks Boosted by $8,000Under the luxury auto dollar limits of Code Sec. 280F, depreciation deductions (including Code Sec. 179 expensing) that can be claimed for passenger autos are subject to dollar limits that are annually adjusted for inflation. For passenger automobiles placed in service in 2012, the adjusted first-year limit is $3,160. For light trucks or vans, the adjusted first-year limit is $3,360. Light trucks or vans are passenger automobiles built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis that are subject to the Code Sec. 280F limits because they are rated at 6,000 points gross (loaded) vehicle weight or less. The applicable first-year depreciation limit is increased by $8,000 (not indexed for inflation) for any passenger automobile that is “qualified property” under the bonus depreciation rules of Code Sec. 168(k) and which isn't subject to a taxpayer election to decline bonus depreciation. Under pre-Act law, qualified property didn't include property placed in service after Dec. 31, 2012 (except for certain aircraft and certain long-production-period property that had, instead, a Dec. 31, 2013 placed-in-service deadline). Thus, under pre-Act law, the $8,000 boost in first-year depreciation allowances wasn't available for new cars and trucks purchased after 2012. New law. The 2012 Taxpayer Relief Act provides that the placed-in-service deadline for “qualified property” is Dec. 31, 2013 (Dec. 31, 2014 for aircraft and long-production-period property). (Code Sec. 168(k)(2), as amended by Act Sec. 331(a)) RIA observation: Thus, for a passenger auto that is qualified property under Code Sec. 168(k), (and isn't subject to the election to decline bonus depreciation and AMT depreciation relief), the 2012 Taxpayer Relief Act extends the placed-in-service deadline for the $8,000 increase in the first-year depreciation limit from Dec, 31, 2012 to Dec. 31, 2013. RIA illustration : T, a calendar year taxpayer, places a new $40,000 vehicle into service in his business on Jan. 5, 2013. Assume that: (1) the vehicle is an auto that is “qualified property” (and an election to decline bonus depreciation and AMT depreciation relief doesn't apply to the vehicle); and (2) the passenger auto first-year allowances remain unchanged for 2013. T is allowed first-year depreciation for 2013 of $11,160 ($3,160 presumed general first-year allowance for 2013 plus $8,000). If the vehicle were instead a light truck or van, T is allowed first-year depreciation for 2013 of $11,360 (the presumed $3,360 general first-year allowance for 2013 plus $8,000).
  • Work Opportunity Tax Credit ExtendedThe work opportunity tax credit (WOTC) allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). Where the employee is a long-term family assistance (LTFA) recipient, the WOTC is a percentage of first and second year wages, up to $10,000 per employee. Generally, the percentage of qualifying wages is 40% of first-year wages; it's 25% for employees who have completed at least 120 hours, but less than 400 hours of service for the employer. For LTFA recipients, it includes an additional 50% of qualified second-year wages. The maximum WOTC for hiring a qualifying veteran generally is $6,000. However, it can be as high as $12,000, $14,000, or $24,000, depending on factors such as whether the veteran has a service-connected disability, the period of his or her unemployment before being hired, and when that period of unemployment occurred relative to the WOTC-eligible hiring date. Under pre-Act law, wages for purposes of the WOTC doesn't include any amount paid or incurred to: (1) a non-veteran who began work after Dec. 31, 2011; or (2) a veteran who began work after Dec. 31, 2012. New law. The 2012 Taxpayer Relief Act retroactively extends the WOTC so that it applies to eligible veterans and nonveterans who begin work for the employer before Jan. 1, 2014. (Code Sec. 51(c)(4)(B), as amended by Act Sec. 309) RIA observation: Thus, the 2012 Taxpayer Relief Act grants a two-year lease on life for the WOTC for eligible nonveterans, and a one-year lease on life for the WOTC for qualifying veterans. Indian Employment Credit Reinstated and ExtendedThe Indian employment credit is 20% of the excess, if any, of the sum of qualified wages and qualified employee health insurance costs (not in excess of $20,000 per employee) paid or incurred (other than paid under salary reduction arrangements) to qualified employees (enrolled Indian tribe members and their spouses who meet certain requirements) during the tax year, over the sum of these same costs paid or incurred in calendar year '93. Under pre-Act law, the credit didn't apply for any tax year beginning after Dec. 31, 2011. New law. The 2012 Taxpayer Relief Act retroactively extends the Indian employment credit for two years. It now applies to tax years beginning before Jan. 1, 2014. (Code Sec. 45A(f), as amended by Act Sec. 304) New Markets Tax Credit Reinstated and ExtendedA new markets tax credit applies for qualified equity investments to acquire stock in a community development entity (CDE). The credit is: (1) 5% for the year in which the equity interest is purchased from the CDE and for the first two anniversary dates after the purchase (for a total credit of 15%), plus (2) 6% on each anniversary date thereafter for the following four years (for a total of 24%). Under pre-Act law, there was a $3.5 billion cap on the maximum annual amount of qualifying equity investments for 2010 and 2011; a carryover was allowed where the credit limitation for a calendar year exceeded the aggregate amount allocated for the year, but no amount could be carried over to any calendar year after 2016. New law. The 2012 Taxpayer Relief Act retroactively extends the new markets tax credit two years, through 2013. It provides that a $3.5 billion cap applies for 2010, 2011, 2012, and 2013, but no amount can be carried over to any calendar year after 2018. (Code Sec. 45D(f), as amended by Act Sec. 305) 15-Year Writeoff for Qualified Leasehold and Retail Improvements and Restaurant Property Reinstated and ExtendedUnder pre-Act law, qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property that was placed in service before 2012 was included in the 15-year MACRS class for depreciation purposes—that is, such property was depreciated over 15 years under MACRS. New law. The 2012 Taxpayer Relief Act retroactively extends for two years the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year MACRS class. Such property qualifies for 15-year recovery if it is placed in service before Jan. 1, 2014. (Code Sec. 168(e)(3)(E), and Code Sec. 168(e)(8)(E), as amended by Act Sec. 311)
  • Expensing Election for Costs of Film and TV Production ExtendedTaxpayers may elect to expense production costs of qualified film and television (TV) productions in the U.S. Expensing doesn't apply to the part of the cost of any qualifying film or TV production that exceeded $15 million for each qualifying production. The limit is $20 million if production expenses were “significantly incurred” in areas (1) eligible for designation as a low-income community or (2) eligible for designation by the Delta Regional Authority (a federal-state partnership covering parts of certain states) as a low-income community or isolated area of distress. Under pre-Act law, these rules applied for qualified film and TV productions beginning before Jan. 1, 2012. New law. The 2012 Taxpayer Relief Act retroactively extends the expensing provision for two years. It applies for qualified film and TV productions beginning before Jan. 1, 2014. (Code Sec. 181(f), as modified by Act Sec. 317) Differential Wage Payment Credit for Employers Reinstated and ExtendedEligible small business employers that pay differential wages—payments to employees for periods that they are called to active duty with the U.S. uniformed services (for more than 30 days) that represent all or part of the wages that they would have otherwise received from the employer—can claim a credit equal to 20% of up to $20,000 of differential pay made to an employee during the tax year. An eligible small business employer is one that: (1) employed on average less than 50 employees on business days during the tax year; and (2) under a written plan, provides eligible differential wage payments to each of its qualified employees. A qualified employee is one who has been an employee for the 91-day period immediately preceding the period for which any differential wage payment is made. Under pre-Act law, the credit was not available for differential wages paid after Dec. 31, 2011. New law. The 2012 Taxpayer Relief Act retroactively extends the credit for two years. It applies for differential wages paid through Dec. 31, 2013. (Code Sec. 45P(f), as amended by Act Sec. 736) Temporary Exclusion of 100% of Gain on Certain Small Business Stock ExtendedA taxpayer may exclude all of the gain on the disposition of qualified small business stock acquired after Sep. 27, 2010 and before Jan. 1, 2012. Under pre-Act law, the exclusion was to be limited to 50% of gain for stock acquired after Dec. 31, 2011. New law. The 2012 Taxpayer Relief Act retroactively extends this provision for two years so that taxpayers may exclude 100% of gain from the disposition of qualified small business stock acquired after Sep. 27, 2010 and before Jan. 1, 2014. (Code Sec. 1202(a)(4), as amended by Act Sec. 324(a)) The 2012 Taxpayer Relief Act also makes certain technical amendments relevant to qualified small business stock acquired during earlier periods (Code Sec. 1202(a)(3) and Code Sec. 1202(a)(4), as amended by Act Sec. 324(b)) Extension and Modification of Reduction in S Corp Recognition Period for Built-In Gains TaxAn S corporation generally is not subject to tax, but instead passes through its income to its shareholders, who pay tax on their pro-rata shares of the S corporation's income. Where a corporation that was formed as a C corporation elected to become an S corporation (or where an S corporation receives property from a C corporation in a nontaxable carryover basis transfer), the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election if the gain is recognized during a recognition period. Under pre-Act law, for S corporation tax years beginning in 2011, no tax is imposed on the net unrecognized built-in gain of an S corporation if the fifth year in the recognition period preceded the 2011 tax year. New law. The 2012 Taxpayer Relief Act provides that for determining the net recognized built-in gain for tax years beginning in 2012 or 2013, the recognition period is the 5-year period beginning with the first day of the first tax year for which the corporation was an S corporation. (Code Sec. 1374(d)(7)(C), as amended by Act Sec. 326(a)(2)) Additionally, effective for tax years beginning after Dec. 31, 2011, for S corporations that report gain from the sale of an asset under the installment method (Code Sec. 453), the treatment of all payments received is governed by the provisions of Code Sec. 1374(d)(7) that apply to the tax year in which the sale was made. (Code Sec. 1374(d)(7)(E), as amended by Act Sec. 326(a)(3))
  • Lower Shareholder Basis Adjustments for Charitable Contributions by S Corporations Reinstated and ExtendedBefore the Pension Protection Act of 2006 (PPA), if an S corporation contributed money or other property to a charity, each shareholder took into account his pro rata share of the fair market value of the contributed property in determining his own income tax liability. The shareholder reduced his basis in his S stock by the amount of the charitable contribution that flowed through to him. The PPA amended this rule to provide that the amount of a shareholder's basis reduction in S stock by reason of a charitable contribution made by the corporation is equal to his pro rata share of the adjusted basis of the contributed property. Under pre-Act law, the PPA rule did not apply for contributions made in tax years beginning after Dec. 31, 2011. New law. The 2012 Taxpayer Relief Act retroactively extends the PPA rule for two years so that it applies for contributions made in tax years beginning before Jan. 1, 2014. (Code Sec. 1367(a)(2), as amended by Act Sec. 325) Subpart F Exception for Active Financing Income Reinstated and ExtendedUnder pre-Act law, certain income from the active conduct of a banking, financing or similar business, or from the conduct of an insurance business (collectively referred to as “active financing income”), was temporarily excluded from the definition of Subpart F income, but only for tax years of foreign corporations beginning after Dec. 31, '98 and before Jan. 1, 2012, and tax years of U.S. shareholders with or within which such tax years of foreign corporations end. New law. The 2012 Taxpayer Relief Act retroactively extends the exclusions for active financing income for two years. Thus, this rule applies to tax years of a foreign corporation beginning after Dec. 31, '98 and before Jan. 1, 2014, and tax years of U.S. shareholders with or within which such tax years of foreign corporations end. (Code Sec. 953(e)(10) and Code Sec. 954(h)(9), as amended by Act Sec. 322) Enhanced Deduction for Food Inventory Reinstated and ExtendedA C corporation may claim an enhanced charitable contribution deduction equal to the lesser of (a) basis plus half of the property's appreciation, or (b) twice the property's basis, for contributions of food inventory that was apparently wholesome food, i.e., meant for human consumption and meeting certain quality and labeling standards. The enhanced contribution is also available for a taxpayer other than a C corporation, but the aggregate amount of contributions of apparently wholesome food that may be taken into account for the tax year can't exceed 10% of the taxpayer's aggregate net income for that tax year from all trades or businesses from which those contributions were made for that tax year. Under pre-Act law, this enhanced charitable deduction didn't apply for contributions after Dec. 31, 2011. New law. The 2012 Taxpayer Relief Act retroactively extends the apparently wholesome food contribution rules for two years to include contributions made before Jan. 1, 2014. (Code Sec. 170(e)(3)(C)(iv), as amended by Act Sec. 314) RIA observation: The 2012 Taxpayer Relief Act did not extend the enhanced deduction for charitable contributions of books (this deduction ceased to apply for contributions made after Dec. 31, 2011), or the enhanced deduction for corporate contributions of computer equipment for educational purposes (this deduction ceased to apply for contributions made during any tax year beginning after Dec. 31, 2011).
  • Research Credit Reinstated and LiberalizedThe research credit equals the sum of: (1) 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount, (unless the taxpayer elected an alternative simplified research credit); (2) the university basic research credit (i.e., 20% of the basic research payments); (3) 20% of the taxpayer's expenditures on qualified energy research undertaken by an energy research consortium. Under pre-Act law, the research credit didn't apply for amounts paid or accrued after Dec. 31, 2011. New law. The 2012 Taxpayer Relief Act retroactively extends the research credit for two years so that it applies for amounts paid or accrued before Jan. 1, 2014. (Code Sec. 41(h)(1), as amended by Act Sec. 301(a)) For tax years beginning after Dec. 31, 2011, the 2012 Taxpayer Relief Act liberalizes the research credit rules for persons that acquire the major portion of either a trade or business or a separate unit of a trade or business of another person. Here, for purposes of calculating the allowable research credit, the amount of qualified research expenses paid or incurred by the acquiring person during the measurement period is increased by certain expenses of the predecessor, and the gross receipts of the acquiring person for such period is increased by certain gross receipts of the predecessor. The measurement period is, with respect to the tax year of the acquiring person for which the research credit is determined, any period of the acquiring person preceding such tax year which is taken into account for purposes of determining the credit for such year. (Code Sec. 41(f)(3)(A) and Code Sec. 41(f)(3)(B), as amended by Act Sec. 301(b)) The 2012 Taxpayer Relief Act also revises the rules for allocating the research credit among members of a controlled group or members of a group of commonly controlled trades or businesses. For tax years beginning after Dec. 31, 2011, the credit for each member of a controlled group is determined on a proportionate basis to its share of the aggregate of the qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums, taken into account by such controlled group for purposes of the research credit. (Code Sec. 41(f)(1)(A)(ii), as amended by Act Sec. 301(c)) A similar rule applies to members of a group of commonly controlled trades or businesses. (Code Sec. 41(f)(1)(B)(ii), as amended by Act Sec. 301(c)) Empowerment Zone Tax Breaks Reinstated and ExtendedThe designation of an economically depressed census tract as an “Empowerment Zone” renders businesses and individual residents within such a Zone eligible for special tax incentives. Under pre-Act law, Empowerment Zone designations expired on Dec. 31, 2011. New law. The 2012 Taxpayer Relief Act extends for two years, through Dec. 31, 2013, the period for which the designation of an empowerment zone is in effect. (Code Sec. 1391(d) , as amended by Act Sec. 327(a)) Thus, the Act extends for two years the empowerment zone tax incentives, including: the 20% wage credit under Code Sec. 1396; liberalized Code Sec. 179 expensing rules ($35,000 extra expensing and the break allowing only 50% of expensing eligible property to be counted for purposes of the investment based phaseout of expensing); tax-exempt bond financing under Code Sec. 1394; and deferral under Code Sec. 1397B of capital gains tax on sale of qualified assets sold and replaced. For a designation of an empowerment zone, the nomination for which included a termination date which is Dec. 31, 2011, termination shall not apply with respect to that designation if the entity which made such nomination amends the nomination to provide for a new termination date in such manner as IRS may provide. (Act Sec. 327(c)) The Act also extends for two years, through Dec. 31, 2018, the period for which a higher percentage exclusion applies for certain qualified small business stock of empowerment zone businesses. (Code Sec. 1202(a)(2), as amended by Act Sec. 327(b))
  • The non-business energy property credit under Code Sec. 25C for energy-efficient existing homes is retroactively extended for two years, to apply to property placed in service after Dec. 31, 2011 and before Jan. 1, 2014. (Code Sec. 25C(g)(2), as amended by Act Sec. 401) A taxpayer can claim a 10% credit on the cost of: (1) qualified energy efficiency improvements, and (2) residential energy property expenditures, with a lifetime credit limit of $500 ($200 for windows and skylights) through 2013.¶ 1004. Nonbusiness energy property credit is reinstated and extended through 2013Code Sec. 25C(g)(2), as amended by 2012 Taxpayer Relief Act §401(a)Generally effective: Property placed in service after Dec. 31, 2011 and before Jan. 1, 2014Committee Reports, NoneFor property placed in service before Jan. 1, 2012, individuals were allowed a nonrefundable personal income tax credit, known as the nonbusiness energy property credit, for certain energy efficient property installed in a dwelling located in the U.S. and owned and used by the taxpayer as the taxpayer's principal residence. ( FTC 2d/Fin ¶A-4750; USTR ¶25C4; TaxDesk ¶569,551; ) The credit was equal to the sum of: (1) 10% of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements (i.e., energy-efficient building envelope components) installed during the tax year, and (2) the amount of residential energy property expenditures (i.e., expenditures for advanced main air circulating fans, for qualified natural gas, propane, or oil furnace or hot water boilers, and for “energy-efficient building property,” including heat pumps, water heaters, and central air conditioners, paid or incurred by the taxpayer during the tax year. Dollar limits applied to the overall credit. FTC 2d/Fin ¶A-4750; FTC 2d/Fin ¶A-4751; USTR ¶25C4; TaxDesk ¶569,551; New Law. Under the 2012 Taxpayer Relief Act, the nonbusiness energy property credit won't apply for property placed in service after Dec. 31, 2013 (rather than after Dec. 31, 2011). (Code Sec. 25C(g)(2) as amended by 2012 Taxpayer Relief Act §401(a)) RIA observation: Taxpayers who, during 2012, made qualified energy efficiency improvements or residential energy property expenditures, should file amended returns.Effective: Property placed in service after Dec. 31, 2011 (2012 Taxpayer Relief Act §401(b)) and before Jan. 1, 2014. (Code Sec. 25C(g)(2) )
  • The credit for energy-efficient new homes under Code Sec. 45L is retroactively extended for two years, for homes acquired after Dec. 31, 2011 and before Jan. 1, 2014. (Code Sec. 45L(g), as amended by Act Sec. 408) The credit for energy-efficient appliances (dishwashers and clothes washers) under Code Sec. 45M is retroactively extended for two years, for appliances produced after Dec. 31, 2011 and before Jan. 1, 2014. (Code Sec. 45M(b), as amended by Act Sec. 409)
  • The alternative fuel vehicle refueling property credit under Code Sec. 30C is retroactively extended for two years, to apply to property placed in service after Dec. 31, 2011 and before Jan. 1, 2014. (Code Sec. 30C(g)(2), as amended by Act Sec. 402) A taxpayer can claim a 30% credit for qualified alternative fuel vehicle refueling property, subject to the $30,000 and $1,000 thresholds. The credit for 2- or 3-wheeled plug-in electric vehicles under Code Sec. 30D is modified and retroactively extended for two years, to apply to vehicles acquired after Dec. 31, 2011 and before Jan. 1, 2014. (Code Sec. 30D(g)(3)(E), as amended by Act Sec. 403 ) ¶ 1006. Credit for 2-or 3-wheeled plug-in electric vehicles is retroactively extended to apply to vehicles acquired before Jan. 1, 2014Code Sec. 30D(g), as amended by 2012 Taxpayer Relief Act §403(a)Generally effective: Vehicles acquired after Dec. 31, 2011 and before Jan. 1, 2014Committee Reports, NoneUnder pre-2012 Taxpayer Relief Act law, a credit, equal to the lesser of 10% of cost or $2,500, was available for 2- or 3-wheeled plug-in electric vehicles that met certain additional requirements, including being acquired before Jan. 1, 2012. et seq.FTC 2d/Fin ¶L-18035 et seq.; USTR ¶304; et seq. et seq.TaxDesk ¶397,170 et seq.; New Law. The 2012 Taxpayer Relief Act provides a credit for a “qualified 2- or 3-wheeled plug-in electric vehicle” equal to the lesser of 10% of its cost or $2,500. (Code Sec. 30D(g)(2) as amended by 2012 Taxpayer Relief Act §403(a)) Among the requirements for being a “qualified 2- or 3-wheeled plug-in electric vehicle” is that the vehicle be acquired after Dec. 31, 2011 and before Jan. 1, 2014. (Code Sec. 30(g)(3)(E) ) RIA observation: Thus, the 2012 Taxpayer Relief Act retroactively extends for two-years the credit for 2- or 3-wheeled plug in electric vehicles that meet certain other requirements to apply to vehicles placed in service after Dec. 31, 2011 and as late as Dec. 31, 2013.Effective: Vehicles acquired after Dec. 31, 2011 (2012 Taxpayer Relief Act §403(c)) and before Jan. 1, 2014 (Code Sec. 30(D)(g)(3)(E) ) ¶ 1008. Non-hydrogen QAFV refueling property credit is retroactively restored and extended to property placed in service before Jan. 1, 2014Code Sec. 30C(g)(2), as amended by 2012 Taxpayer Relief Act §402(a)Generally effective: Property placed in service after Dec. 31, 2011 and before Jan. 1, 2014Committee Reports, NoneUnder pre-2012 Taxpayer Relief Act law, for qualified alternative fuel vehicle refueling property (QAFV refueling property) placed in service after Dec. 31, 2010 and before Jan. 1, 2012, taxpayers were entitled to a 30% income tax credit for the cost of installing QAFV refueling property to be used in a taxpayer's trade or business or installed at the taxpayer's principal residence. The credit could not exceed $30,000 per tax year, per location, in the case of depreciable QAFV refueling property used in a trade or business, and $1,000 per tax year per location for any other QAFV refueling property installed on property which is used as the taxpayer's principal residence. For hydrogen refueling property, the property has to be placed in service before Jan. 1, 2015. FTC 2d/Fin ¶L-18040; FTC 2d/Fin ¶L-18041; USTR ¶30C4; TaxDesk ¶397,201; New Law. The 2012 Taxpayer Relief Act provides that the credit does not apply to QAFV refueling property (other than QAFV refueling property relating to hydrogen) placed in service after Dec. 31, 2013. (Code Sec. 30C(g)(2) as amended by 2012 Taxpayer Relief Act §402(a)) RIA observation: Thus, the 2012 Taxpayer Relief Act retroactively restores and extends for two years the period for which the credit is available with respect to QAFV refueling property placed in service before Jan. 1, 2014.Effective: Property placed in service after Dec. 31, 2011 (2012 Taxpayer Relief Act §402(b)) and before Jan. 1, 2014. (Code Sec. 30C(g)(2) )
  • The cellulosic biofuel producer credit under Code Sec. 40(b) is modified and extended for one year, to apply to qualified cellulosic biofuel production after Dec. 31, 2008 and before Jan. 1, 2014. (Code Sec. 40(b)(6)(H), as amended by Act Sec. 404(a)) New rules for algae treated as qualified feedstock apply to fuels sold or used after Jan. 2, 2013. (Code Sec. 40(b)(6)(E), as amended by Act Sec. 404(b)) The credit for biodiesel and renewable diesel under Code Sec. 40A is retroactively extended for two years, for fuel sold or used after Dec. 31, 2011 and before Jan. 1, 2014. (Code Sec. 40A(g), as amended by Act Sec. 405)) The credits with respect to facilities producing energy from certain renewable resources under Code Sec. 45 is modified and extended one year. A facility using wind to produce electricity will be a qualified facility if it is placed in service before 2014. (Code Sec. 45(d)(1), as amended by Act Sec. 407) ¶ 1005. Credits with respect to facilities producing energy from certain renewable resources are extended and modifiedCode Sec. 45(d)(1), as amended by 2012 Taxpayer Relief Act §407(a)(1) Code Sec. 45(d)(1), as amended by 2012 Taxpayer Relief Act §407(a)(3)(A)(i) Code Sec. 45(d)(2)(A)(i), as amended by 2012 Taxpayer Relief Act §407(a)(3)(A)(ii) Code Sec. 45(d)(3)(A)(i)(I), as amended by 2012 Taxpayer Relief Act §407(a)(3)(A)(iii) Code Sec. 45(d)(6), as amended by 2012 Taxpayer Relief Act §407(a)(3)(iv) Code Sec. 45(d)(7), as amended by 2012 Taxpayer Relief Act §407(a)(3)(v) Code Sec. 45(d)(9)(B), as amended by 2012 Taxpayer Relief Act §407(a)(3)(A)(vi) Code Sec. 45(d)(11)(B), as amended by 2012 Taxpayer Relief Act §407(a)(3)(A)(vii) Code Sec. 45(d)(2)(A), as amended by 2012 Taxpayer Relief Act §407(a)(3)(B) Code Sec. 45(d)(3)(A)(ii), as amended by 2012 Taxpayer Relief Act §407(a)(3)(C) Code Sec. 45(d)(4), as amended by 2012 Taxpayer Relief Act §407(a)(3)(D) Code Sec. 45(d)(9), as amended by 2012 Taxpayer Relief Act §407(a)(3)(E)Generally effective: Jan. 2, 2013Committee Reports, NoneIn general, for any tax year, a credit for electricity produced from certain renewable resources is available for electricity produced from qualified energy resources and refined coal and Indian coal produced at a qualified facility during the ten-year period beginning on the date the facility was originally placed in service. The electricity must be sold by the taxpayer to an unrelated person during the tax year. The credit is available at a reduced rate for electricity produced and sold from certain types of qualified facilities. For certain types of qualified facilities, taxpayers can elect to receive a grant in lieu of the electricity production credit, but cannot receive both a credit and a grant with respect to the same facility. For qualified property that is part of qualified investment credit facilities, taxpayers can make an irrevocable election to take a 30% energy credit under Code Sec. 48 instead of the electricity production credit. Under pre-2012 Taxpayer Relief Act law, a wind facility had to be originally placed in service before Jan. 1, 2013. Wind, closed-loop biomass, open-loop biomass, municipal solid waste (which consisted of landfill gas and trash facilities), hydropower and marine and hydrokinetic facilities had to be “placed in service” before Jan. 1, 2014. There was no provision for a facility that was under construction, being improved or modified before Jan. 1, 2014 to be treated as a qualified facility. et seq.FTC 2d/Fin ¶L-17771 et seq.; USTR ¶454.09; et seq. et seq.TaxDesk ¶384,054 et seq.; New Law. For wind, certain closed-loop biomass, certain open-loop biomass, landfill gas, trash, certain qualified hydropower, and marine and hydrokinetic renewable energy facilities, the 2012 Taxpayer Relief Act changes the placed-in-service date from “before Jan. 1, 2014” to those facilities the construction of which begins before Jan. 1, 2014. (Code Sec. 45(d) as amended by 2012 Taxpayer Relief Act §407(a)(3)(A)) RIA observation: Thus, the Taxpayer Relief Act provides that the facilities described above can be under construction and still be qualified facilities for purposes of the electricity production credit, under Code Sec. 45, as long as construction of the facility begins before Jan. 1, 2014. This provision has the effect of allowing more facilities to qualify for purposes of the electricity production credit and presumably encourages more electricity production from certain renewable resources.Wind facilities. The 2012 Taxpayer Relief Act provides that a qualified facility for purposes of producing electricity from wind is a facility owned by the taxpayer that is originally placed in service after Dec. 31, '93 and before Jan. 1, 2014. (Code Sec. 45(d)(1) as amended by 2012 Taxpayer Relief Act §407(a)(1)) Certain closed-loop biomass facilities. The 2012 Taxpayer Relief Act, with respect to certain biomass facilities that are modified to co-fire with coal, with other biomass, or with both, where the modification is approved by the Biomass Power for Rural Development Programs or is part of a pilot project of the Commodity Credit Corporation (CCC), provides that a closed-loop biomass facility is treated as modified before Jan. 1, 2014 if the construction of the modification begins before that date.RIA observation: Presumably, any modification whose construction begins before Jan. 1, 2014 must still be approved by the Biomass Power for Rural Development Programs or part of a pilot project of the CCC.(Code Sec. 45(d)(2)(A)(ii) as amended by 2012 Taxpayer Relief Act §407(a)(3)(B)) Certain open-loop biomass facilities. With respect to open-loop biomass facilities that do not use agricultural livestock waste nutrients, the 2012 Taxpayer Relief Act provides that a qualified facility includes a facility the construction of which begins before Jan. 1, 2014. (Code Sec. 45(d)(3)(A)(ii) as amended by 2012 Taxpayer Relief Act §407(a)(3)(C)) Geothermal facilities. For geothermal facilities, the 2012 Taxpayer Relief Act provides that a qualified facility includes a facility using geothermal energy, the construction of which begins before Jan. 1, 2014. For a facility using solar energy, a qualified facility must be placed in service before Jan. 1, 2006. The term “geothermal facility” doesn't include any property the basis of which is taken into account for purposes of the energy credit. (Code Sec. 45(d)(4) as amended by 2012 Taxpayer Relief Act §407(a)(3)(D)) Municipal solid waste. For municipal solid waste facilities (including landfill gas and trash facilities), a qualified facility for purposes of the electricity production credit includes a facility the construction of which begins before Jan. 1, 2014. For the modification of the definition of municipal solid waste, see ¶1011 . (Code Sec. 45(d)(6) as amended by 2012 Taxpayer Relief Act §407(a)(3)(A)(iv)) ; (Code Sec. 45(d)(7) as amended by 2012 Taxpayer Relief Act §407(a)(3)(A)(v)) Incremental hydropower production. For a facility producing incremental hydropower production, an efficiency improvement or addition to capacity is treated as placed in service before Jan. 1, 2014, if the construction of the improvement or addition begins before Jan. 1, 2014. (Code Sec. 45(d)(9) as amended by 2012 Taxpayer Relief Act §407(a)(3)(E)) RIA observation: Thus, the 2012 Taxpayer Relief Act allows facilities generating electricity from certain renewable resources that are under construction before Jan. 1, 2014, to be treated as qualified facilities for purposes of the electricity production credit.Effective: Jan. 2, 2013. (2012 Taxpayer Relief Act §407(d)(1)) ¶ 1009. Income and excise tax credits/refunds for biodiesel and renewable diesel are extended retroactively through 2013Code Sec. 40A(g), as amended by 2012 Taxpayer Relief Act §405(a) Code Sec. 6426(c)(6), as amended by 2012 Taxpayer Relief Act §405(b)(1) Code Sec. 6427(e)(6)(B), as amended by 2012 Taxpayer Relief Act §405(b)(2)Generally effective: Fuel sold or used after Dec. 31, 2011 and before Jan. 1, 2014Committee Reports, NoneUnder pre-2012 Taxpayer Relief Act law, for fuel sold or used before Jan. 1, 2012 FTC 2d/Fin ¶L-17570; FTC 2d/Fin ¶L-17571; USTR ¶40A4; TaxDesk ¶382,401; , a credit against income tax (the “biodiesel fuels income tax credit”) was allowed for biodiesel fuels, as a component of the general business credit. The credit equals the sum of three component credits: (1) the biodiesel mixture credit—$1.00 for each gallon of biodiesel used in the production of a qualified biodiesel mixture; (2) the biodiesel credit—$1.00 for each gallon of biodiesel, not in a mixture, that is: (a) used by the taxpayer as a fuel in a trade or business (and not sold in a retail sale), or (b) sold by the taxpayer at retail to a person and placed in the fuel tank of that person's vehicle; and (3) the small agri-biodiesel producer credit—10¢ for each gallon of “qualified agri-biodiesel production,” up to 15 million, produced by a small producer. (See FTC 2d/Fin ¶L-17571; et seq. USTR ¶40A4; TaxDesk ¶382,401; et seq.) Also, for fuel sold or used before Jan. 1, 2012 FTC ¶W-1500; FTC ¶W-1518; USTR ¶64,264; , the Code provided an excise tax credit (the “biodiesel mixture excise tax credit”) which was applied against a taxpayer's Code Sec. 4081 removal-at-terminal excise tax liability, and equalled $1.00 per gallon of biodiesel used by the taxpayer in producing a biodiesel mixture for sale or use in the taxpayer's trade or business. The above excise tax credit and biodiesel fuels income tax credit were coordinated to bar a taxpayer from claiming both credits for the same biodiesel. (See FTC ¶W-1518; et seq.; USTR Excise Taxes ¶ 64,264.)In addition, for fuel sold or used before Jan. 1, 2012 FTC ¶W-1500; FTC ¶W-1519; USTR ¶64,274; , to the extent the above biodiesel mixture excise tax credit exceeded a taxpayer's Code Sec. 4081 excise tax liability, the taxpayer, subject to certain limitations, was allowed an excise tax refund equal to the amount of that excess credit. (See FTC ¶W-1519; et seq.; USTR Excise Taxes ¶ 64,274.)The above described income tax credit (other than the small agri-producer credit component), excise tax credit, and excise tax refund were also available for renewable diesel (which is, generally, treated the same as biodiesel under the Code). (See FTC 2d/Fin ¶L-17585.1; et seq. USTR ¶40A4.05; TaxDesk ¶382,409; et seq.) Under pre-2012 Taxpayer Relief Act law, these renewable diesel fuel incentives expired as described above for biodiesel. FTC 2d/Fin ¶L-17585; FTC 2d/Fin ¶L-17585.1; USTR ¶40A4.05; TaxDesk ¶382,409; New Law. The 2012 Tax Relief Act retroactively (see below) extends the income and excise tax credit and refund provisions for biodiesel and renewable diesel fuel to make them apply for two additional years (through Dec. 31, 2013) by modifying the termination rules under those provisions to replace references to termination for sales or uses after “Dec. 31, 2011” with references to termination for sales or uses after “Dec. 31, 2013.” (Code Sec. 40A(g) as amended by 2012 Taxpayer Relief Act §405(a)) (Code Sec. 6426(c)(6) as amended by 2012 Taxpayer Relief Act §405(b)(1)) (Code Sec. 6427(e)(6)(B) as amended by 2012 Taxpayer Relief Act §405(b)(2)) Effective: Fuel sold or used after Dec. 31, 2011 (2012 Taxpayer Relief Act §405(c)) and before Jan. 1 2014. (Code Sec. 40A(g) ) (Code Sec. 6426(c)(6) ) (Code Sec. 6427(e)(6)(B) ) RIA observation: Generally, the biodiesel mixture and renewable diesel mixture excise tax credits must first be taken on Form 720, the quarterly excise tax return, as a credit against any taxable fuel tax liability (for gasoline, diesel fuel and kerosene) reported on Form 720 (see FTC ¶W-1518; ). Then, any excess credit amounts may generally be claimed as an excise tax refund on Form 8849 (or, alternatively, as a fuels tax credit against income tax on Form 4136) (see FTC ¶W-1519; ). IRS may issue guidance on how to claim this excise tax credit/refund retroactively for 2012.RIA observation: The biodiesel and renewable diesel fuels income tax credits are computed on Form 8864 (see FTC 2d/Fin ¶L-17571; TaxDesk ¶382,401; ) and then included on Form 3800 (as part of the general business credit) (see FTC 2d/Fin ¶L-15200; TaxDesk ¶380,500; ), and both forms must be attached to the taxpayer's tax return, i.e., the Form 1040 or Form 1040NR for individuals, Form 1120 for corporations, or Form 1041 for estates and trusts, for the applicable year. If a taxpayer has already filed 2012 returns, the retroactive extension of these credits (to the beginning of 2012) may require that they file an amended return to claim a credit.
  • ¶ 1301. Distribution restrictions eased for “in-plan Roth rollovers.” Code Sec. 402A(c)(4)(E), as amended by 2012 Taxpayer Relief Act §902(a)Generally effective: Transfers to designated Roth accounts made after Dec. 31, 2012Committee Reports, NoneIf an “applicable retirement plan” (such as a 401(k) plan or a 403(b) annuity plan) includes a “qualified Roth contribution program,” then plan participants may elect to make either (i) taxable contributions to a “designated Roth account” in the plan, or (ii) tax-free elective or salary reduction contributions to a non-Roth account. A participant who receives a plan distribution from a 401(k) plan or 403(b) plan generally must include in gross income the amount of elective or salary reduction contributions received in the distribution, and the earnings on these contributions. In contrast, after a five-tax-year holding period, a participant may receive from a designated Roth account qualified distributions—of both the elective or salary reduction contributions and the earnings on the elective deferrals—that are completely excludable from gross income. Qualified distributions from a designated Roth account must be made after the participant reaches age 59-1/2, dies, or becomes disabled. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12295; ; FTC 2d/Fin ¶H-12295.1; et seq. USTR ¶4014.1745; ; USTR ¶402A4; TaxDesk ¶283,401; et seq. Pension Analysis ¶35,251.1; et seq. Pension & Benefits Explanations ¶401-4.1745; ; Pension & Benefits Explanations ¶402A-4; )The term “applicable retirement plan” refers to: ... an employees' trust described in Code Sec. 401(a) which is tax-exempt under Code Sec. 501(a), ... a plan under which amounts are contributed by an individual's employer for a Code Sec. 403(b) annuity contract, and ... a governmental deferred compensation plan under Code Sec. 457. FTC 2d/Fin ¶H-12295.10; USTR ¶408A4; Pension Analysis ¶35,251.10; Pension & Benefits Explanations ¶408A-4; RIA observation: Applicable retirement plans that include a “qualified Roth contribution program” are commonly called Roth 401(k), Roth 403(b), or Roth 457 plans.A “qualified Roth contribution program” is a program that allows a participant to elect to make after-tax “designated Roth contributions” in lieu of all or a portion of the “elective deferrals” that the participant would be otherwise eligible to make under the applicable retirement plan.To include a “qualified Roth contribution program,” a 401(k), 403(b), or 457 plan must: (1) establish a separate “designated Roth account” for the designated Roth contributions of each employee (and for the earnings allocable to these contributions); (2) maintain separate recordkeeping for each account; and (3) not allocate to the designated Roth account: (a) forfeitures, or (b) contributions other than designated Roth contributions and Code Sec. 402A(c)(3)(B) rollover contributions. FTC 2d/Fin ¶H-12295; FTC 2d/Fin ¶H-12295.3; Pension Analysis ¶35,251; Pension Analysis ¶35,251.3; A participant may receive a distribution of elective contributions under a 401(k) plan, or salary reduction contributions under a 403(b) plan, only after attainment of age 59-1/2, severance from employment, plan termination, hardship, disability, or death. ( FTC 2d/Fin ¶H-8975; ; FTC 2d/Fin ¶H-8978; ; FTC 2d/Fin ¶H-9200; ; FTC 2d/Fin ¶H-9201; ; FTC 2d/Fin ¶H-12479; USTR ¶4014.1763; ; USTR ¶4034.12; TaxDesk ¶284,005; Pension Analysis ¶28,128; ; Pension Analysis ¶28,502; ; Pension Analysis ¶36,080; Pension & Benefits Explanations ¶401-4.1763; ; Pension & Benefits Explanations ¶403-4.12; )Eligible rollover distributions from eligible retirement plans (i.e., generally, plan distributions other than periodic distributions, minimum required distributions, or hardship distributions) may be contributed, without an annual dollar limit, to a 401(k) plan or a 403(b) plan and certain other plans, if certain requirements are met. Distributions rolled over to an eligible retirement plan generally are not includible in gross income. ( FTC 2d/Fin ¶H-3300; FTC 2d/Fin ¶H-3305.1; FTC 2d/Fin ¶H-11400; FTC 2d/Fin ¶H-11402; FTC 2d/Fin ¶H-12400; FTC 2d/Fin ¶H-12491; USTR ¶4024.04; ; USTR ¶4034.03; USTR ¶4574; TaxDesk ¶135,714; TaxDesk ¶144,001; TaxDesk ¶284,706; Pension Analysis ¶32,803; Pension Analysis ¶36,092; Pension Analysis ¶40,406.1; Pension & Benefits Explanations ¶402-4; Pension & Benefits Explanations ¶403-4.03; Pension & Benefits Explanations ¶457-4; )In contrast, for any distribution made with respect to an individual from an eligible retirement plan that is contributed to his Roth IRA in a qualified rollover contribution, the individual must include in gross income any amount that would have been includible in gross income if it were not part of a qualified rollover contribution. The Code Sec. 72(t) 10% early withdrawal tax does not apply to the rolled over amounts includible in gross income. ( FTC 2d/Fin ¶H-12290; FTC 2d/Fin ¶H-12290.20; USTR ¶408A4; TaxDesk ¶283,326; Pension Analysis ¶35,221; Pension & Benefits Explanations ¶408A-4; )However, any portion of a distribution from a Roth IRA that: (i) is allocable to a qualified rollover contribution that was made to the Roth IRA from an applicable retirement plan, (ii) is made within the five-tax-year period beginning with the tax year in which the rollover contribution was made, and (iii) was includible in gross income as part of the qualified rollover contribution, is subject to the 10% early withdrawal tax, as if the distribution were includible in income. ( FTC 2d/Fin ¶H-12290; FTC 2d/Fin ¶H-12290.38; USTR ¶408A4; TaxDesk ¶283,346; Pension Analysis ¶35,239; Pension & Benefits Explanations ¶408A-4; ) In-plan Roth rollovers. The 2010 Small Business Act expanded the types of distributions that could be rolled over into designated Roth accounts by providing for so-called in-plan Roth rollovers. Specifically, for an applicable retirement plan that maintains a qualified Roth contribution program, a distribution to an individual from (i) the portion of the plan that is not a designated Roth account, may be rolled over, in a qualified rollover contribution (within the meaning of Code Sec. 408A(e), i.e., the Roth IRA rules), to (ii) the designated Roth account maintained under the plan for the benefit of the individual to whom the distribution was made. However, the rollover is not tax-free, see below. FTC ¶H-12295.5D; USTR ¶402A4; Pension Analysis ¶35,251.5D; Pension & Benefits Explanations ¶402A-4; RIA observation: Thus, an “in-plan Roth rollover” is a taxable distribution from an individual's plan account other than a designated Roth account that is rolled over to his designated Roth account in the same plan.Before the 2012 Taxpayer Relief Act, to be eligible for rollover to a designated Roth account, a distribution had to be (i) an eligible rollover distribution, (ii) otherwise allowed under the plan, and (iii) allowable in the amount and form elected. For example, an amount in a 401(k) plan account that was subject to distribution restrictions (e.g., because the participant has not reached age 59-1/2) could not have been rolled over to a designated Roth account. However, an employer may expand its distribution options beyond those currently allowed by the plan (e.g., by adding in-service distributions or distributions before normal retirement age) in order to allow employees to make rollover contributions to the designated Roth account through a direct rollover. FTC ¶H-12295.5E; USTR ¶402A4; Pension Analysis ¶35,251.5E; Pension & Benefits Explanations ¶402A-4; The tax-free treatment of rollovers that ordinarily applies does not apply to in-plan Roth rollovers. Instead, the amount that an individual receives in a distribution from an applicable retirement plan that would be includible in gross income if it were not part of a qualified rollover distribution, must be included in his gross income. FTC ¶H-12295.5K; USTR ¶402A4; Pension Analysis ¶35,251.5K; Pension & Benefits Explanations ¶402A-4; IRS guidance ( Notice 2010-84, Q&A 4) provided that a plan could be amended to allow in-plan Roth rollovers for amounts that were permitted to be distributed under the Code, but that were “not otherwise distributable” to plan participants under a plan's more restrictive provisions. RIA illustration : Wally, age 60, worked for Hi-Tech Corp., and participated in Hi-Tech's Roth 401(k) plan, which provides for in-plan Roth rollovers. Although Wally had already passed the age (59 1/2) at which a plan distribution may be paid or made available to him, the plan did not allow for distributions while Wally was still employed. Under the in-plan Roth rollover rules, however, the plan could be amended so that the vested balance of Wally's 401(k) plan account—that would not otherwise be distributable to him because of the plan's prohibition on in-service distributions—could be transferred to a designated Roth account in an in-plan Roth rollover.New Law. The 2012 Taxpayer Relief Act provides that an applicable retirement plan that includes a qualified Roth contribution program may allow an individual to elect to have the plan transfer any amount not otherwise distributable under the plan to a designated Roth account maintained for the individual's benefit. The transfer is treated as an in-plan Roth rollover, which was contributed in a qualified rollover contribution to the designated Roth account. (Code Sec. 402A(c)(4)(E) as amended by 2012 Taxpayer Relief Act §902(a)) RIA observation: Thus, pending further guidance, it appears that amounts that do not otherwise meet the Code-based requirements for being a qualified rollover distribution may be deemed to be qualified rollover distributions when rolled-over to a designated Roth account in an in-plan Roth rollover.RIA observation: Because the Act does not limit the phrase “any amount not otherwise distributable” to 401(k) elective deferrals, it appears that a plan can elect to apply the new in-plan Roth rollover provisions not only to 401(k) elective deferral accounts, but also to any employer contribution accounts (e.g., matching contribution accounts and/or profit sharing contribution accounts), rollover accounts, and employee after-tax contribution accounts. IRS will have to clarify this in future guidance.RIA illustration : Wally, age 40, works for Hi-Tech Corp., and participates in Hi-Tech's Roth 401(k) plan, which provides for in-plan Roth rollovers. Although Wally has not yet reached the age (59 1/2) at which a plan distribution may be paid or made available to him, or met the other Code-based requirements for a distribution, under the 2012 Taxpayer Relief Act, Wally may have the balance of his 401(k) plan account that's not otherwise distributable to him (i.e., due to his failure to meet the Code Sec. 401(k)(2)(B)(i) distribution restrictions), transferred to a designated Roth account in an in-plan Roth rollover.Further, solely because of the transfer, the plan will not be treated as violating the provisions of: ... Code Sec. 401(k)(2)(B)(i), regarding restrictions on the distribution of employer contributions to a 401(k) plan; ... Code Sec. 403(b)(7)(A)(i), regarding restrictions on distributions from custodial accounts for regulated investment company stock; ... Code Sec. 403(b)(11), regarding restrictions on distributions from a 403(b) plan; ... Code Sec. 457(d)(1)(A), regarding restrictions on distributions from a 457 plan; or ... 5 USC 8433, regarding restrictions on distributions from the Federal Government's Thrift Savings plan. (Code Sec. 402A(c)(4)(E) ) RIA observation: Pending IRS clarification, it is unclear whether limits and/or conditions can be imposed upon participants and/or their accounts in order to make an in-plan Roth rollover election. To avoid major administrative headaches in implementing the expanded in-plan Roth rollover provisions, plan sponsors should include references to an administrative procedure or policy that imposes reasonable conditions on how and when a participant can make an in-plan Roth direct rollover election. These rules should include the following: the timing of in-plan Roth rollovers conversions (e.g., effective only on the first day of the month following the date of a participant's request);the frequency of such rollovers (e.g., only once annually per participant);the accounts that are eligible for a rollover election (e.g., 401(k) elective deferral accounts, matching contribution accounts, profit sharing contribution accounts, rollover accounts, and/or employee after-tax contribution accounts); andwhether an eligible account must be 100% vested in order for a rollover election to be made.Effective: Transfers to designated Roth accounts made after Dec. 31, 2012, in tax years ending after that date. (2012 Taxpayer Relief Act §902(b))
  • Transcript

    • 1. 2012 & 2013 Tax Update Highlights Presented by Zandra O’Keefe, CPA CBIZ MHM, LLC
    • 2. Circular 230 Notice and DisclaimersTo ensure compliance with requirements imposed by the IRS, we inform you that- unless specifically indicated otherwise-any tax advice in this communication is not written with the intent that it be used, and in fact it cannot be used, to avoid penalties under the Internal Revenue Code, or to promote, market, or recommend to another person any tax related matter. This educational seminar is provided with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ) 2
    • 3. 2013 Tax Law Changes AGENDA• New for 2013 part of Health Care Act and Proposed Regs. – Change in Tangible Property Rules (businesses) – Medicare Surtaxes: earned income and net investment income – Medical expenses – New qualified plan tax credit• American Taxpayer Relief Act of 2012 – First step in adverting ―the fiscal cliff‖ 3
    • 4. New for 2012 and forward Change in Tangible Property Rules• New regulations change what should be capitalized versus deducted• IRS allowing for automatic method changes for 2 years• New rules significantly impact building owners by giving them the ability to deduct losses on replaced structures - this includes individual owners of rental properties• Taxpayers with large repair & maintenance expenses also will be impacted• A new de minimis rule may apply for some taxpayers; policy in place 1/1/13; ―applicable financial statement‖ (audit, potentially review FS)• IRS audit / compliance to increase• Tip: Consider cost segregation studies and 3115 Change in Accounting Method, (accelerate timing of tax deductions), consult your tax advisor 4
    • 5. New for 2013 and forward Additional Medicare Tax .9%• Additional .9% Medicare Surtax on earned income of higher-income individuals after 12/31/12. Subject to MAGI thresholds• Employer withholding required and any difference paid / accounted for on personal tax return• Increases estimated tax due for self employed• http://www.irs.gov/Businesss/Small-Businesses-&-Self-Employed/Questions- and-Answers 5
    • 6. 2013 3.8% Medicare Surtax - Net InvestmentIncome Tax• Individuals http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax- FAQs – 3.8% of the lesser of: • Net investment income, or • Excess of Modified AGI over the threshold amounts below – Modified AGI = AGI + foreign earned income exclusion Filing Status Threshold Married Filing Jointly $250,000 Single/Head of Household $200,000 Married Filing Separately $125,000 6
    • 7. 2013 3.8% Medicare Tax – Trusts and Estates• 3.8% of the lesser of: – Undistributed net investment income, or – AGI over the amount at which the highest tax bracket is applicable ($11,950 for 2013)• Does not apply to simple trusts since, by definition, all income is distributed annually (but would apply to income distributed to beneficiaries)• Does not apply to grantor trusts since they are disregarded for income tax purposes (but would apply to income reported by grantor) 7
    • 8. 3.8% Medicare Tax – Net InvestmentIncome• Net Investment Income – Defined as investment income less otherwise allowable deductions properly allocable to such income• Includes three categories: – Gross income from interest, dividends, annuities, royalties and rents (other than such income derived in the ordinary course of an active trade or business) – Other gross income from any passive trade or business or business in the trading of financial instruments or commodities – Net gains attributable to the disposition of property (other than property held in an active trade or business)• Less: – Deductions properly allocable to such gross income or net gain 8
    • 9. 3.8% Medicare Tax – Key Points• Taxpayer’s must have both NII and gross income over the applicable thresholds in order to be subject to the tax• The thresholds are NOT adjusted for inflation – This may cause a problem similar to the AMT in the future• The inclusion of passive activities in NII represents a huge shift in traditional tax planning – more emphasis will be placed on treating profitable activities as active instead of passive to avoid the 3.8% surtax, however • Passive losses may go unused • Net income from an active trade or business may be subject to self employment tax 9
    • 10. 3.8% Medicare Tax – Key Points• Only property sold that was not held in a trade or business is included in net investment income – In the case of sales of interests in a partnership or S corporation we have to do some calculations in order to determine how much of the gain or loss is attributable to an active trade or business – The Proposed Regulations include a complex four step process to achieve this• The surtax also applies to income attributable to ―working capital‖ 10
    • 11. 3.8% Medicare Tax – Key Points• Net investment income is determined by taking into account the gross income or net gain from the three categories and reduced by allowable deductions that are ―properly allocable‖ – Examples include, investment interest expense, investment fees, expenses related to rents, trade or business deductions and state and local income taxes – The allocation of state and local taxes between net investment income and other income can be determined under ―any reasonable method‖ – The proposed regs. provide a safe harbor method of allocating state and local taxes based on the ratio of NII to gross income 11
    • 12. 3.8% Medicare Tax – Key Points• The 2% limitation for miscellaneous deductions and the overall deduction limit of certain itemized deductions will apply in calculating the NII• Capital loss carryovers from years prior to 2013 can be used to offset gains• Investment interest expense carryover from years prior to 2013 can be used in calculating NII• Unused passive losses from years prior to 2013 can be used in calculating NII 12
    • 13. 3.8% Medicare Tax – Key Points • The 3.8% Medicare tax does not apply to distributions from qualified retirement plans • However, those distributions still increase MAGI which could either – raise the taxpayer’s MAGI over the threshold amount, thus subjecting the taxpayer to the tax, or – increase the amount subject to the tax by increasing the spread between MAGI and the threshold amount • The 3.8% Medicare tax does not apply to investment income excludible from taxable income (e.g. municipal bond interest) 13
    • 14. 3.8% Medicare Tax – Case Study Assume the following income (Total $325K): Interest income from various corporate bonds and bank $10,000 accounts Tax-exempt interest income from various municipal bonds $8,000 Qualified dividend income from various mutual funds and stock $12,000 investments Net long-term capital gains from the disposition of various $40,000 mutual funds and stock investments Regular IRA distribution $100,000 Net rental income from a building that Joe owns $15,000 Distributive ordinary trade or business income from an LLC in $20,000 which Joe does not materially participate Distributive net Section 1231 gain from the same LLC $10,000 Distributive ordinary trade or business income from an S $60,000 corporation in which Joe materially participates Distributive net Section 1231 gain from the same S corporation $50,000 14
    • 15. 3.8% Medicare Tax – Case StudyNet investment income is calculated as follows:Interest income from various corporate bonds and bank accounts $10,000Qualified dividend income from mutual funds and stock $12,000investmentsNet long-term capital gains from the disposition of investments $40,000Net rental income $15,000Ordinary trade or business income from LLC in which Joe does $20,000not materially participateNet Section 1231 gain from the LLC $10,000Net investment income $107,000 15
    • 16. 3.8% Medicare Tax – Case StudyModified adjusted gross income is calculated as follows(doesn’t include $8K tax exempt inc):Interest income from various corporate bonds and bank accounts $10,000Qualified dividend income from mutual funds and stock $12,000investmentsNet long-term capital gains from the disposition of investments $40,000Regular IRA distribution $100,000Net rental income $15,000Ordinary trade or business income from the LLC $20,000Net Section 1231 gain from the same LLC $10,000Ordinary trade or business income from the S corporation $60,000Net Section 1231 gain from the same S corporation $50,000Modified AGI $317,000 16
    • 17. 3.8% Medicare Tax – Case StudyThe 3.8% Medicare contribution tax is calculated as follows: Modified AGI $317,000 Less Threshold $200,000 Modified AGI in Excess of Threshold $117,000 Lesser of Net Investment Income and Modified AGI in Excess of $107,000 Threshold Medicare Tax Rate 3.8% Medicare Contribution Tax $4,066 17
    • 18. Planning Strategies to Reduce 3.8%Medicare Tax• Convert to a Roth IRA so future qualified retirement plan distributions don’t increase MAGI – Although regular IRA distributions are not subject to 3.8% tax, they are included in modified AGI – In prior example, if IRA distribution was from Roth IRA, modified AGI would have been reduced to $217,000, so the maximum subject to 3.8% tax would be reduced to $17,000 – If modified AGI (minus threshold amount) is greater than net investment income even without IRA distributions, no benefit to switching to Roth 18
    • 19. Planning Strategies to Reduce 3.8%Medicare Tax• Realign Investment Strategies – Shift investments to growth securities that don’t produce dividends, i.e. tax-exempt bonds, insurance (with cash buildups) and annuities – Take advantage of installment sale treatment to spread passive income over several years – Time gains and losses to offset • Be careful of wash sale rules on loss positions • Gains not subject to wash sale rules – Shift investments to children • Avoid 3.8% tax if MAGI less than threshold • Kiddie tax may tax income at parents’ marginal rate (under 19 or under 24 and full time student) 19
    • 20. Planning Strategies to Reduce 3.8%Medicare Tax • Passive Activities – Evaluate profitable passive activities to see if changes could be made to reach to the level of material participation. – Watch self-employment income from partnerships and LLC’s – Review passive activity rules to see if passive activities can be grouped with non passive activities to avoid passive income – Factors to consider, similarities, common ownership, geographical locations, interdependence of operations • Consider Passive Loss investment opportunities to offset Passive Income (be aware of self-rent rules) 20
    • 21. Health Care Act - Medical expenses• 2012 AGI floor 7.5%• 2013 AGI floor 10%• Eligible expenses: Medical and dental services, prescription drugs, co pays not reimbursed by H.S.A. or F.S.A. Out of pocket medical insurance premiums not deducted as self employed in via cafeteria plan on W-2. (Don’t double dip)• H.S.A. limit 2013 self only $3,250; family $6,450 (advantage: keep it even if didn’t use it; grows tax deferred)• FSA employer determines limit for 2013 can’t exceed $2,500 (disadvantage: use it or lose it)• Tips: Time medical expenses if possible and for family members with lower AGI who can benefit 21
    • 22. Adopt A Qualified Retirement Plan – Tax Credit• Part of general business tax credit: equals 50% cost to set up and administer plan maximum of $500 maximum per year for each of the first 3 years• 100 or fewer employees who received at least $5,000 in compensation for the preceding year• At one participant must be non-highly compensated employee• Generally employee cannot be the same for whom contributions were made in the 3 year period before the first year of the credit• Form 8881 Credit for Small Employer Pension Plan Startup Costs• Age weighted, cross tested, illustration that optimizes contributions for owners• Tip: Can help reduce owners’ AGI threshold, earnings grow tax deferred, potential personal tax savings 22
    • 23. H.R.8 the American Taxpayer Relief Act of 2012 “ATRA”Signed into law in January 2, 2013 by President Obama 23
    • 24. H.R.8 the American Taxpayer Relief Act of 2012 “ATRA”• ATRA adds nearly $4 Trillion to federal deficits over a decade compared to the debt reduction envisioned in the extreme scenario of ―the fiscal cliff‖.• Extends low income tax rates for nearly every American except the relative handful above the $400,000 threshold• Puts off (for at least two months) the automatic budget cuts that were part of ―the fiscal cliff‖ and would have saved about $109 Billion in federal spending on defense and non-defense programs alike• Sets up a more heated fight in late February when Treasury must come to Congress to seek an increase in the government’s borrowing limit (raising federal debt ceiling above $14.5 Trillion)• Consideration of effect on economic recovery and job creation 24
    • 25. H.R.8 the American Taxpayer Relief Act of 2012 “ATRA”―The AICPA is pleased that Congress has reached an agreement,‖ said Edward Karl, vice president–Tax for the AICPA. ―The uncertainty of the tax law has unnecessarily impeded the long-term tax and cash flow planning for businesses and prevented taxpayers from making informed decisions. The agreement should also allow the IRS and commercial software vendors to revise or issue new tax forms and update software, and allow tax season to begin with minimal delay.‖ 25
    • 26. ATRA American Tax Relief Act of 2012 –Key Tax Provisions• Individuals• Business• Provisions not addressed 26
    • 27. ATRA– Individual Tax Key ProvisionsGenerally all of the individual income tax provisions from 2001 EGTRRA and 2003 JGTRRA were permanently extended including:• Lower 10/15/25/28/33/35% tax rate structure for individuals (except high income individuals – upcoming slide)• Lower 15% tax rate on long-term capital gains and qualified dividends (except high income individuals – upcoming slide) 27
    • 28. ATRA– Individual Tax Key ProvisionsGenerally all of the individual income tax provisions from 2001 EGTRRA and 2003 JGTRRA were permanently extended including:• Marriage penalty relief: expanded 15% bracket and standard deduction for married taxpayers filing jointly to twice that of single taxpayers• Increase in refundable child tax credit to $1,000 – Regardless of number of children – To the extent of 15% of the taxpayer’s earned income in excess of $3,000 threshold amount thru 2017 28
    • 29. ATRA– Individual Tax Key ProvisionsGenerally all of the individual income tax provisions from 2001 EGTRRA and 2003 JGTRRA were permanently extended including (continued):• Increase in maximum dependent care credit and eligible expenses. IRC 21, 2012 Taxpayer Relief Act §101(a)(1) http://www.irs.gov/publications/p503/index.html – Maximum credit is $1,050 (35% of up to $3,000 of eligible expenses) if one qualifying individual; – $2,100 (35% of up to $6,000 of eligible expenses) if two or more qualifying individuals; – 35% credit rate is reduced, but not below 20%, by one percentage point for each $2,000 (or fraction thereof) of adjusted gross income (AGI) above $15,000 29
    • 30. ATRA– Individual Tax Key ProvisionsGenerally all of the individual income tax provisions from 2001 EGTRRA and 2003 JGTRRA were permanently extended including (continued):• Increase in non refundable adoption credit to $10,000 (inflation adjusted) and related provisions – increased to $10,000 for all adoptions; MAGI phase out from $75K-$150K – Code Sec. 36C, 2012 Taxpayer Relief Act §101(a)(1 http://www.irs.gov/Individuals/Adoption-Benefits-FAQs• The adoption assistance exclusion Code Sec. 137, 2012 Taxpayer Relief Act §101(a)(1) – increased to $10,000 for all adoptions, inflation adjusted to $12,170 for 2012; increased AGI phase out $182,520 - $222,250. IRS yet to come out with 2013 inflation adjusted figures 30
    • 31. ATRA– Individual Tax Key ProvisionsGenerally all of the individual income tax provisions from 2001 EGTRRA and 2003 JGTRRA were permanently extended including (continued):• $5,250 income exclusion from employer-provided educational assistance, restoration of the exclusion for graduate level courses – Separate written employer plan subject to notification requirements, cannot provide employees with a choice between this benefit and additional taxable income, courses need not be related to employee’s job. – IRC 127, 2012 Taxpayer Relief Act §101(a)(1) http://www.irs.gov/publications/p970/ch11.html• Personal Nonrefundable Credits May Offset AMT and Regular Tax for All Tax Years. IRC 26(a), as amended by Act Sec. 104(c) 31
    • 32. ATRA– Individual Tax Key ProvisionsGenerally all of the individual income tax provisions from 2001 EGTRRA and 2003 JGTRRA were permanently extended including (continued):• Increase maximum in annual Coverdell education savings account (CESA) contributions to $2,000 and related provisions, http://www.irs.gov/uac/Coverdell-Education-Savings-Accounts, IRC 25A, 530 as amended by Act Sec 101(a)(1) – Individuals or corporations can make non-deductible cash contributions, max $2K per beneficiary, individual is subject to MAGI phase out (MFJ $190K-$220K) or 6% excise tax applies to excess funded. – Beneficiary must be under age 18, unless exempted as special needs – Contributions can be made until April 15 of the following year – Non taxable if spent on qualified education expenses, includes elementary, secondary school and higher education. – Earnings could be taxable upon withdraw if not used for qualified expenses and additional 10% tax may apply – After age 30 must distribute or rollover to another beneficiary – Other rules may apply including coordination with other education credits 32
    • 33. ATRA– Individual Tax Key ProvisionsGenerally all of the individual income tax provisions from 2001 EGTRRA and 2003 JGTRRA were permanently extended including (continued):• No Phase-Out of Personal Exemptions Except for Higher-Income Taxpayers – Phase out (PEP)) by 2% for each $2,500 (or portion thereof) by which the taxpayers AGI exceeds the applicable threshold – starting threshold of $300,000 for joint filers; $250,000 single filers• Waiver of 60 month limit on the above the line deduction for student loan interest deduction. IRC 221, 2012 Taxpayer Relief Act §101(a)(1) – Tax years after 12/31/12 – Deduction is lesser of amount paid or $2,500, – Subject to AGI limitations e.g. $60K-$75K married filing joint – http://www.irs.gov/taxtopics/tc456.html 33
    • 34. ATRA– Individual Tax Key ProvisionsHigher Income Taxpayers Definition New for 2013:• Highest marginal tax rate will increase to 39.6% up from 35%• Capital gains and qualified dividends tax rate will increase to 20% for married taxable income in excess of $450,000( $400,000 for single filers)• Note: above tax increase is in additional to the 3.8% Medicare tax on net investment income of higher income taxpayers that went into effect January 1 2013.• Overall limitation on itemized deductions and phase-out of personal exemptions will be reinstated beginning in 2013 for couples with AGI in excess of $300,000 ($250,000 for single filers). – Indexed for inflation beginning in 2014• Tip: Determine if you have capital loss carry forwards that can be utilized• Tip: Consider optimizing qualified retirement plan contributions to decrease AGI 34
    • 35. ATRA– Individual Tax Key ProvisionsAMT Patch Permanently Extended:• Retroactive to 2012• AMT exemption for 2012 increases for married couples from $45,000 to $78,750 and for single filers from $32,000 to $50,600• Indexed for inflation beginning in 2013• AMT Triggers: state and local tax deductions, real estate and personal property tax deductions, interest on home equity loan or lie of credit not used to buy build or improve residence; Misc itemized 2% deductions, LTCG and dividend income, tax-exempt interest on certain private-activity municipal bonds, ISO exercise, etc• Tip: Customized tax planning with your tax professional before year end to determine optimal timing of payment for certain deductions 35
    • 36. ATRA– Estate and Gift Tax KeyProvisions• Permanently extends the $5M lifetime gift and estate tax exemption as amended by Act Sec 101• Raises the maximum gift and estate tax rate from 35% to 40%• 2013 exemption is projected to be $5.25M up from $5.12M in 2012• Exemption will be indexed for inflation and is projected to increase to $7.5M by 2020.• Other estate and gift tax provisions from 2010 act permanently extended including the ability to carryover any unused estate tax exemption to the surviving spouse IRC 2010 (c)(2)(B) etc as amended by Act Sec 101• Tip: Time to meet with professional advisors if you believe you have a taxable estate, minimize overall tax, avoid probate, living will, life and disability insurance, etc. $13K and annual exclusion other gifts; consider funding working child’s ROTH IRA to extent of earned income limit 36
    • 37. ATRA– Individual Tax Key ProvisionsOther Individual Tax Extenders set to expire end 2011 and wereretroactively reinstated for 2012 and 2013:• Above the line deduction for tuition and fees IRC 222(e) as amended by Act Sec 207; – $4,000 for an individual whose adjusted gross income (AGI), with certain modifications, doesnt exceed $65,000 ($130,000 for a joint return), – $2,000 for an individual whose modified AGI exceeds $65,000 ($130,000 for a joint return), but doesnt exceed $80,000 ($160,000 for a joint return), – or zero for other taxpayers. – For taxpayer, spouse and dependents and used for higher qualified education expenses. – Maximum amount to be reduced by other tax free assistance and other educational assistance programs e.g. CESAs – Tips: expenses for an academic term beginning as late as Mar. 31, 2014 may qualify for the deduction, if the taxpayer pays these expenses before 2014. Consider paying some tuition for the 2014 term at the end of 2013—namely, the dollar amount equal to the maximum allowable deduction 37
    • 38. ATRA– Individual Tax Key ProvisionsOther Individual Tax Extenders set to expire end 2011 and wereretroactively reinstated for 2012 and 2013:• Deduction for state and local sales taxes IRC 164(b)(5)(l) as amended by Act Sec 205; – (e.g. new car or boat) election to deduct general state and local sales tax paid e.g. on high ticket items, in lieu of total state and local income taxes e.g. state withholding and estimated tax paid• $250 above the line deduction for teacher classroom expenses. IRC 62(a)(2)(D) as amended by Act Sec 201;• Exclusion of cancellation of indebtedness income from the discharge of qualified personal residence indebtedness (originally expired at the end of 2012) IRC 108(a)(1)(E) as amended by Act Sec 202 – Same rules as prior, see IRS form 982 38
    • 39. ATRA– Individual Tax Key ProvisionsOther Individual Tax Extenders set to expire end 2011 and wereretroactively reinstated for 2012 and 2013 (continued):• Deduction for qualified mortgage insurance premiums IRC 163(h)(3)(E) as amended by Act Sec 204; – Paid or accrued before 1/1/14 not applicable to any period after 12/31/13.• Exclusion for employer provided mass transit and parking benefits IRC 132(f)(2) as amended by Act Sec 203 – $240 / month 2012 and $245 / month estimated for 2013 excludable from employee income 39
    • 40. ATRA– Individual Tax Key ProvisionsOther Individual Tax Extenders set to expire end 2011 and wereretroactively reinstated for 2012 and 2013 (continued):• Charitable deduction for contributions of real property for conservations purposes IRC 170(b)(1)(E)(vi) as amended by Act Sec 206(a); – 50% charitable contribution limitation; 100% for qualified ranchers and farmers made in 2012 or 2013. – Illustration • In 2013, an individual with a contribution base of $100 makes a qualified conservation contribution of property with a fair market value of $80 and makes other charitable contributions subject to the 50% limitation of $60. • Allowed a deduction of $50 in 2013 for the non-conservation contributions (50% of the $100 contribution base) and is allowed to carry over the excess $10 for up to five years. • No current deduction is allowed for the qualified conservation contribution, but the entire $80 qualified conservation contribution may be carried forward for up to 15 years 40
    • 41. ATRA– Individual Tax Key ProvisionsAdditional items expired and retroactively reinstated for 2012 and 2013:• Tax-free distributions from IRAs for charitable purposes IRC 408(d)(8)(F) as amended by Act Sec 208 – Maximum $100,000, must be trustee to trustee transfer, qualifies as RMD. – Qualified distributions from IRAs for charitable purposes made prior to 2/1/2013 may be deemed as made in 2012. – Cash distributions taken from IRAs after 11/30/12 and transferred to charity prior to 2/1/13 may qualify as tax-free distributions in 2012 (assuming the distributions otherwise qualify for the exclusion) – Note: no taxable income (no increase to AGI) and no corresponding charitable deduction• Tip: Work with professionals now to meet Feb. 1 2013 deadline for 2012; part of overall estate plan and lifetime family financial plan; to benefit charities and their missions that you care about 41
    • 42. ATRA– Individual Tax Key ProvisionsAdditional items benefitting lower and middle-income taxpayers extended thru 2017 (5 years):• More generous American Opportunity Tax Credit (AOTC) for higher education expenses; – maximum $2,500 qualified education expenses (e.g. tuition, course materials, fees) paid per eligible student – non refundable personal credit can be claimed against AMT liability – for first 4 years of post- secondary education degree or certificate program – MAGI phase out between $160,000 and $180,000 for married joint filers – Code Sec. 25A(i) ; 2012 Taxpayer Relief Act §103(a)(2) – http://www.irs.gov/uac/American-Opportunity-Tax-Credit 42
    • 43. ATRA– Individual Tax Key ProvisionsAdditional items benefitting lower and middle-income taxpayers extended thru 2017 (5 years):• Expansion of the refundable child tax credit (CTC) IRC 24 and 32(n) as amended by Act 101(a)(1) http://www.irs.gov/publications/p972/ar02.html – $1,000 max per child, no limit on # of children. – to the extent of 15% of the taxpayers earned income in excess of a threshold amount e.g. $3,000• Expansion and modifications to the Earned Income Credit (eligible taxpayers with 3 or more qualifying children); $5K increase threshold and phase outs See Act 103(c)(2); 101(a)(1) 43
    • 44. ATRA– Individual Tax Key ProvisionsPayroll Tax Holiday Expires:• During 2011 and 2012: – OASDI tax (Medicare tax) reduced from 6.2% to 4.2% for W-2 employees (2%) – Rate on self employment income was reduced from 12.4% to 10.4% (2%)• For 2013 3.8% increase in total: – OASDI wage limit base $113,700 times 2% equals $2,274 tax increase in 2013 for both employees and self employed taxpayers – This tax is in addition to the 0.9% Medicare tax on earned income of higher income taxpayers that went into effect 1/1/13. Tip: Self employed taxpayers should consider increasing their estimated tax payments accordingly (safe harbor rules) 44
    • 45. ATRA– Business Tax Key ProvisionsRetroactively reinstated for 2012 and 2013 but not extended permanently:• Cost Recovery Provisions Extended and Expanded – – IRC Sec 179 immediate deduction restored to $500K for qualified tangible personal property. (subject to $2M phase out and net income provisions). 2013 was $25K max and $200K phase out – same for 2014 if no further extension in future law. – Reinstated provision that allows IRC Sec 179 immediate deduction of up to $250K qualified leasehold restaurant and retail improvement property; – Extends the 50% bonus depreciation provision placed in service before 1/1/2014 (original use). Extended election to accelerate AMT credits in lieu of bonus depreciation. 45
    • 46. ATRA– Business Tax Key ProvisionsRetroactively reinstated for 2012 and 2013 but not extended permanently: – First-Year depreciation cap for 2013 automobiles and trucks boosted by $8,000 • Passenger auto as qualified property IRC 168(k), not subject to the election to decline bonus depreciation and AMT depreciation relief • Placed in service by 12/31/13; by 12/31/14 for aircraft and long production period property IRC 168(k)(2) • Example: $40K cost passenger auto, $3,160 first year plus $8,000 potential total deduction $11,160 46
    • 47. ATRA– Business Tax Key ProvisionsExpired at the end of 2011 and were retroactively reinstated for 2012 and 2013 but not extended permanently:• Work opportunity tax credit (WOTC) (employer hiring certain targeted groups e.g. veterans an income tax credit against their 1st and 2nd year earnings; non profit employers can also benefit). IRC 51(c)(4)(B) as amended by Act Sec 309.• Indian Employment Credit Reinstated and Extended IRC 45A(f) as amended by Act Sec. 304• New markets tax credit (credit for qualified equity investments to acquire stock in a community development entity $3.5B cap no carryover) IRC 45D(f) as amended by Act Sec 305;• 15-year straight line cost recover for qualified leasehold, restaurant and retail improvements IRC 168(e)(3)(E) and IRC 168(3)(8)(E) as amended by Act Sec 311; 47
    • 48. ATRA– Business Tax Key ProvisionsExpired at the end of 2011 and were retroactively reinstated for 2012and 2013 but not extended permanently:• Expensing Election for Costs of Film and TV Production incurred in certain qualified US areas. IRC 181(f) as modified by Act Sec 317• Differential wage payment credit for eligible small employers when their employees are called to US active duty. IRC 45P(f) as amended by Act Sec 736• 100% exclusion of gain from sale of qualified small business stock (IRC Sec 1244 QSB generally engaged in active trade or business and not have assets that exceed $50M; held stock at least 5 years) IRC 1202(a)(3) and IRC 1202(a)(4) as amended by Act Sec 324(b); (PSCs not eligible)• 5-year recognition period for built-in gains of S-corporations (conversion C to S-corporation) IRC 1374(d)(7)(C) as amended by Act Sec 326(a)(2); 48
    • 49. ATRA– Business Tax Key ProvisionsExpired at the end of 2011 and were retroactively reinstated for 2012and 2013 but not extended permanently:• Basis adjustment to stock of S Corporations making charitable contributions of appreciated property, shareholder adjusts basis euqal to pro rata share of the adjusted basis of the property contributed. IRC 1367(a)(2) as amended by Act Sec 325;• Subpart F exception for active financing income. IRC 953(e)(10) and IRC 954(h)(9) as amended by Act Sec 322;• Enhanced charitable deduction for contributions of ―apparently wholesome‖ food inventory by C Corporations. IRC 170(e)(3)(C)(iv) as amended by Act Sec 314 49
    • 50. ATRA– Business Tax Key ProvisionsExpired at the end of 2011 and were retroactively reinstated for 2012and 2013 but not extended permanently:• Research Credit Reinstated and Liberalized IRC 41 as amended by Act Sec 301• Empowerment Zone Tax Breaks Reinstated and Extended IRC 1391, 1394, 1397 as amended by Act Sec 327 50
    • 51. ATRA– Other Tax Key ProvisionsEnergy incentives expired at the end of 2011 and were extended for 2012 and 2013:• Residential energy property non-refundable personal credit located in the US. IRC 25C(g)(2) as amended by Act Sec 401(b);• Credit equal to sum of: – (1) 10% of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements (i.e., energy-efficient building envelope components) installed during the tax year, and – (2) the amount of residential energy property expenditures (i.e., expenditures for advanced main air circulating fans, for qualified natural gas, propane, or oil furnace or hot water boilers, and for ―energy-efficient building property,‖ including heat pumps, water heaters, and central air conditioners, paid or incurred by the taxpayer during the tax year. – Lifetime credit limit of $500 ($200 for windows and skylights) 51
    • 52. ATRA– Other Tax Key ProvisionsEnergy incentives expired at the end of 2011 and were extended for 2012 and 2013:• Energy efficient new homes credit for eligible contractors. $2K or $1K. IRC 45L(g) as amended by Act Sec 408;• Energy efficient appliances manufacturers credit (dishwashers and clothes washers) IRC 45M(b) as amended by Act Sec 409; 52
    • 53. ATRA– Other Tax Key ProvisionsEnergy incentives expired at the end of 2011 and were extended through 2013:• Credit for 2- or 3-wheeled plug-in electric vehicles IRC 30D(g)(3)(E), as amended by Act Sec. 403 – Credit equal to the lesser of 10% of its cost or $2,500.• Non-hydrogen qualified alternative fuel vehicle (QAFV) refueling property credit is retroactively restored and extended to property placed in service before Jan. 1, 2014. IRC 30C(g)(2) as amended by Act Sec 402(b) – 30% income tax credit for cost of installation not to exceed $30K/year per location – Used in taxpayers trade or business or installed at principal residence 53
    • 54. ATRA– Other Tax Key ProvisionsEnergy incentives expired at the end of 2011 and were extended through 2013:• Renewable electricity production credit IRC 45(d)(a) as amended by Act Sec 407; – e.g. Wind, closed-loop biomass, open-loop biomass, municipal solid waste (which consisted of landfill gas and trash facilities), hydropower and marine and hydrokinetic facilities construction to begin before 1/1/2014.• Credit for biodiesel and renewable diesel used as fuel. IRC 40A(g) as amended by Act Sec 405. – Income and excise tax credit and refund provisions – IRS Forms 720, 8849, 4136, 8864 and 3800 54
    • 55. ATRA– Other Provisions• Medicare service payment cuts made to physicians deferred for one year• Federal-long term unemployment benefits extended for one year• Federal milk subsidy extended for one year• Individual taxpayers may now transfer amounts from a qualified retirement plan to qualified ROTH plan (e.g. ROTH 401(k)) without paying an early withdrawal penalty. IRC 402A(c)(4)(E) as added by Act Sec 1002 – Treated as in plan rollover, it is NOT tax-free, look for further guidance – Conversion tax anticipated to offset half of the $24 Billion from next slide, balance anticipated to be offset by future discretionary spending cuts split equally between defense and non-defense spending – Gets around AGI limitation for ROTH IRAs contributions 55
    • 56. Items that remain to be addressed…• Automatic spending cuts scheduled to go into effect on Jan 1 2013 deferred until 3/1/2013; projected cost $24 Billion• Automatic spending cuts ―sequestration‖ expected to be addressed this March; likely in conjunction with a negotiation on the debt ceiling $14.5 Trillion.• Long-term tax reform not yet addressed• Debt reduction $16 Trillion not yet addressed 56
    • 57. Obama Tax Plan – Individuals• What did not get in the new law – Cap certain deductions or exclusions at 28% for taxpayers in the 36% and 39.6% brackets – Eliminate the carried interest ―loophole‖ for hedge fund managers and other similar service providers – Eliminate a special depreciation ―loophole‖ for corporate jets (this would increase the period for depreciation from 5 years to 7 years and would raise $2 billion over 10 years) – Replace the AMT with the ―Buffett Rule‖ – taxpayers with income over $1 million must pay an effective federal income tax rate of at least 30%. 57
    • 58. Top 5% Income Earners paid 58.7% of the TaxesCategory AGI Cut Off Number Share of Income TaxTop 0.1% $1,432,890 137,982 17.1%Top 1% $343,927 1,380,000 36.7%Top 5% $154,653 6,899,000 58.7%Top 10% $112,124 13,798,000 70.5%Top 25% $66,193 34,496,000 87.3%Top 50% $32,396 68,991,000 97.7%Bottom 50% <$32,396 68,991,000 2.3%Source: Tax Foundation, based on IRS returns 2009
    • 59. Potential for Corporate Tax Reform• February 2012-The President’s Framework for Business Tax Reform (the Framework) – Rough blueprint for the President’s plan • To cut corporate tax rates to internationally competitive levels • Simplify the corporate tax rules • Reduce or eliminate tax loopholes in the current system 59
    • 60. Summary/Key TakeawaysHighlights of ATRA:• Tax rates (top bracket, capital gains, qualified dividends, Medicare tax) increases for high income taxpayers new for 2013• AMT Patch permanently extended, planning opportunities• Payroll tax holiday expired• Business can deduct more of their qualified asset purchases; consider cost segregation study for buildings and tenant improvements• Estate tax rate increases 5%. Review your estate / gift tax plan with your advisory professionals if you believe you will be subject to estate tax• Consider tax free distributions from IRAs for charitable purposes• Consider ROTH IRAs and taxable rollovers; coordinate with investment advisor and tax professional; can gift to fund for working children 60
    • 61. Summary/Key Takeaways• 2013 planning with investment advisor for capital gains; any capital loss carry forwards to offset gains?• Optimize funding deductible retirement plans; can reduce AGI / tax liabilities• Delay in tax legislation can delay filing. Affects IRS tax forms and tax preparation software development. Result: potentially more individual extensions (however note that tax liability due 4/15/13 regardless of filing an extension or late payment penalties result).• Optimal tax planning requires customized solutions; integrated / coordinated with services of other professional advisors with your specific needs in mind as part of a ―holistic approach‖. 61
    • 62. Keeping you up to date…• CBIZ / MHM weekly update (email database; sign up sheet) – Indiv/bus tax updates• Upcoming events: – Eye on Washington Quarterly Business Tax Update: Tuesday January 22, 2013 1-2pm CDT (Phoenix noon – 1:00 pm) – Healthcare Reform Seminar for employers (having 50+ employees) • Contact Angie Avers (602) 650-6260 direct aavers@cbiz.com • Tucson - AZ Inn Jan 23 / Phoenix - Phoenix Art Museum Jan 24 • AZ CFO / CEO 2013 Economic Outlook for Phoenix – Guest speaker Barry Broome, President & CEO of GPEC at Phoenix Art Museum. Jan. 30• Contact Susan Alispahic to be added to our educational notification lists – SAlispahic@cbiz.com; (602) 650-6245 direct• Our CBIZ MHM Phoenix website http://www.cbiz.com/cbizmhm-phoenix/ 62
    • 63. Questions?
    • 64. CBIZ MHM, LLC Contact Information Zandra L. OKeefe CPA Managing Director  602.264.6835  zokeefe@cbiz.com 64
    • 65. Thank You