How will the American Taxpayer Relief Act affect you?

The American Taxpayer Relief Act of 2012, which was signed into law on Jan. 2, includes new tax rates, restrictions on itemized deductions and exemptions, and extensions of certain deductions and credits. Some changes will influence your 2013 federal income tax planning, and others can affect your 2012 tax return. Here are highlights.

New tax rates

Certain changes that begin in 2013, such as new tax rates, will affect you when your taxable income reaches specified levels. For example, a federal income tax rate of 39.6% will apply if your 2013 taxable income exceeds $450,000 and your filing status is married filing jointly. The higher rate begins at taxable income over $400,000 when you’re single.

Other federal tax brackets – from 10% to 35%, depending on your income – still apply to both 2012 and 2013 individual returns.

In addition, capital gains rates will increase for 2013 and future years when your taxable income exceeds the $450,000/$400,000 thresholds. At that income level, the maximum rate for most long-term capital gains will be 20%.

The zero-percent rate is still in effect when you’re married filing jointly and your 2013 income is less than $72,500 ($36,250 if you’re single).

Return of former limitations

Restrictions on itemized deductions and exemptions also begin in 2013. Both limitations increase the amount of tax you pay when your adjusted gross income exceeds $300,000 if you’re married filing jointly ($250,000 when you’re single).

As an illustration, the personal exemption you claim for yourself, your spouse, and your dependents – a deduction of $3,900 each in 2013 – is reduced once your income reaches those levels.


Extended provisions

The act extended familiar itemized deductions, including state and local sales tax and mortgage insurance premiums.

Above-the-line deductions, such as the qualified tuition deduction for higher education expenses and the $250 deduction for unreimbursed expenses if you’re a teacher, are also available for both 2012 and 2013.

Another tax break that was renewed: the ability to contribute up to $100,000 from your traditional IRA to a qualified charity. As before, when you’re age 70-1/2 or older, you can make a distribution directly from your IRA to the charity. The amount you donate is not included in gross income, and you can consider it part of your required minimum distribution for the year.

Business benefits

For both 2012 and 2013, you can claim 50% bonus depreciation, up to $500,000 in Section 179 expensing, and a 15-year lifespan for leasehold, restaurant, and retail improvements.

The American Taxpayer Relief Act contains more beneficial provisions, including opportunities for Roth conversions within your retirement plan and an increased alternative minimum tax exemption. Call us for guidance in creating a tax plan for your specific circumstances and goals.

Mike Scholz, CPA, is a partner at Wegner CPAs.

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