In this newsletter you will find information on updates and changes in the law on both the Federal and State level. If you have any questions, please feel free to contact us at (504) 569-2900.
For Louisiana taxpayers living in the following Parishes: Ascension, Assumption, East Baton Rouge, East Feliciana, Iberville, Jefferson, Lafourche, Livingston, Orleans, Plaquemines, St. Bernard, St. Charles, St. Helena, St. James, St. John the Baptist, St. Mary, St. Tammany, Tangipahoa, Terrebonne, Washington and West Feliciana; the IRS provided Hurricane Isaac relief by postponing various tax filing and payment deadlines that occurred on or after August 26, 2012. This included corporations and businesses that previously obtained an extension until Sept. 17, 2012, to file their 2011 returns and individuals and businesses that received a similar extension until Oct. 15. This also included estimated third quarter tax payments, which normally would have been due September 17, 2012, for entities and individuals that pay taxes quarterly. The postponed filings and tax payments are due January 11, 2013.
On January 1, 2013, Congress passed the American Taxpayer Relief Act (“ATRA”), which the President signed into law the following day. Importantly, the ATRA allows individual tax rates to remain the same for individuals with income less than $400,000 and families with income of less than $450,000. Additionally, the ATRA makes permanent the $5 million estate and gift tax exclusion, but increases the maximum estate tax rate to 40%. Below is a summary of these, and other, provisions.
The ATRA makes permanent the Bush tax cut rates for all brackets, except for brackets affecting individuals with income of more than $400,000 and families with income of more than $450,000. For these taxpayers, income above those levels will be taxed at a 39.6% rate. Additionally, these high income taxpayers will pay a 20% rate on long-term capital gains. All other taxpayers will continue to pay a 15% rate on long-term capital gains. Qualified dividends will continue to be taxed at the respective taxpayer’s capital gains rate. The rates for collectibles and unrecaptured Section 1250 gain similarly remain the same. Please remember, however, that taxpayers exceeding certain thresholds will pay a 3.8% tax on net investment income under IRC Section 1411, which is a direct result of the Patient Protection and Affordable Care Act discussed in previous Tax Alerts.
While rates remain the same for individuals making less than $400,000, it should be noted that the ATRA did not extend the 2012 payroll tax holiday. As a result, wage earners and self-employed individuals will pay 6.2% in Social Security taxes in 2013, up 2% from 2012.
For trusts and estates, the ATRA retained the 2012 tax rates for all bracket levels except the highest level. The entire bracket previously taxed at the 35% rate will now be taxed at a 39.6% rate.
The ATRA provides a permanent patch to the AMT for 2012 and beyond by increasing exemption amounts and providing an annual inflation adjustment to such exemption amounts beginning in 2013. The ATRA additionally allows nonrefundable personal credits to the entire amount of an individual’s regular tax and AMT. The exemption amounts in 2012 are:
• $50,600 for unmarried individuals;
• $78,750 for married individuals filing jointly; and
• $39,375 for married individuals filing separately.
The ATRA revives the limitation on itemized deductions and the personal exemption phaseout, but a higher applicable income threshold will apply. These thresholds are:
• $250,000 for unmarried individuals;
• $300,000 for married couples filing jointly;
• $150,000 for married individuals filing separately; and
• $275,000 for heads of households.
The ATRA preserved the $5 million, indexed for inflation, estate tax, gift tax, and generation skipping tax exclusion and increased the maximum tax rate to 40%. Portability, which allows a surviving spouse to use a deceased spouse’s unused exclusion if the estate makes a proper election, has been made permanent. Additionally, the ATRA extends the estate tax deduction for state estate taxes paid.
• Section 179 – The dollar limit for 2012 and 2013 is $500,000 with a $2 million investment limit.
• Bonus Depreciation – Fifty percent bonus depreciation has been extended through 2013.
• Work Opportunity Tax Credit – The provision which provides a tax credit to employers who hire individuals from targeted groups has been extended through 2013.
• Qualified Leasehold Improvements – The 15-year recovery period for qualified leasehold improvements, qualified retail improvements and qualified restaurant property has been extended through 2013.
• Some other extended provisions include:
Certain energy tax incentives were extended through 2013. These include:
• The Section 45 wind credit for facilities that produce energy from wind facilities;
• The energy efficient credits for new and existing homes;
• The credit for manufacturing energy efficient appliances; and
• Credits for bio-diesel and renewable diesel.
• Marriage Penalty Relief – The ATRA preserves the ability for a married couple filing a joint return to take a standard deduction equal to twice the standard deduction allowed for a single individual.
• State and Local Sales Tax Deduction – The election to claim an itemized deduction for state and local sales taxes paid instead of state and local income taxes has been extended through 2013.
• Change to Roth Account Rollovers – Many of the restrictions on participants with 401(k)s to roll over funds to certain Roth accounts have been lifted. Furthermore, participants in plans with in-plan Roth conversion features can now make transfers to a Roth account at any time.
• Child Tax Credit – The $1,000 child tax credit has been extended permanently.
• American Opportunity Tax Credit – The AOTC has been extended until 2017.
• Student Loan Interest Deduction – The ATRA permanently suspends the 60-month rule which limited the number of months interest paid on student loans could be deducted.
• Employer-Provided Education Assistance – The exclusion from income and employment taxes of employer-provided education assistance has been permanently extended and increased to $5,250.
• Teachers’ Classroom Expense Deduction – This deduction has been extended through 2013.
• Cancellation of Mortgage Debt Exclusion – The provision excluding from cancellation of debt income up to $2 million of cancelled mortgage debt has been extended through 2013.
• Mortgage Insurance Premiums – The provision that treats mortgage insurance premiums as deductible interest has been extended through 2013.
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