New Tax Rates and Other News

After a rather quiet spring, there has been a flurry of tax-related activity and news from both the State Capitol in St. Paul, as well as Capitol Hill in Washington.  Here are a few things to keep your eye on.

  • At the State Capitol, lawmakers are debating a tax bill that will raise income taxes on the “top 2% of taxpayers” to a new top rate of 9.4%, giving Minnesota the 4th highest tax rates in the country. There is some confusion on what the “top 2%” actually is. Some reports place this new top tax rate on married taxpayers with taxable income of more than about $140,000, while other reports state the new top rate will kick in on married taxpayers with taxable income of more than $250,000. The House passed the bill late last night, and the Senate has yet to vote on the matter. No matter how it passes, the Governor is expected to sign it.
  • The same tax bill being debated in the Senate lowers the sales tax in Minnesota from 6.875% to 6.0%, but subjects a number of things to sales tax that were previously exempt, most notably all clothing, warehousing services, and attorney’s services. It also raises the per-pack cigarette tax significantly.
  • In the wake of the IRS appearing to inappropriately target conservative organizations seeking non-profit status, the acting commissioner of the IRS has stepped down, and will face a second day of questioning by the Senate today.
  • Also, due to the cuts imposed by the sequester, the IRS will be closed entirely this Friday, May 24th. No phone lines will be answered, no returns will be processed, and all enforcement activity will cease for that day. This is the first of a number of scheduled closures that will take place over the summer.

We will keep a close watch on the votes at the State Capitol and let you know the details once they pass the final tax bill.

Breaking News – Tax “Fiscal Cliff” Avoided

In the early morning hours of New Year’s Day, the U.S. Senate passed a bill to deal with the tax increases associated with the “Fiscal Cliff”.  The House passed the same bill late last evening, and the President has said he will sign the bill into law.  The law contains changes for both the year just ended and the New Year just begun.  The following are the items that apply to most of our readers for the 2012 year. Our next post will detail those effective for 2013 and beyond.

Individual Changes Effective for 2012

  • The Alternative Minimum Tax (AMT) has been fixed permanently to prevent middle-class taxpayers from falling into its higher tax rates. The AMT kicks in on AMT taxable income of $50,600 for individuals and $78,750 for married couples filing jointly. These amounts will be increased to match inflation.
  • In addition, all personal tax credits can be used against both regular and AMT taxes going forward.
  • The American Opportunity Tax Credit, which allows for up to a $2,500 Federal tax credit for the first 4 years of college expenses has been extended through 2017.
  • Also, the above-the-line deduction for tuition and fees of up to $4,000 has been revived for 2012 and continues for 2013.
  • The above-the-line deduction of up to $250 for elementary and secondary school teachers has been revived for 2012 and continues for 2013.
  • The option to deduct state and local sales taxes in place of state and local income taxes is revived for 2012 and continues for 2013.
  • The treatment of mortgage insurance premiums as deductible home mortgage interest is revived for 2012 and in place for 2013.
  • Increased Earned Income Tax Credits and Child Tax Credits are extended through 2017.
  • The tax credit for certain energy efficient home improvements and for energy-efficient appliances is revived for 2012 and in place through 2013.

Business Changes Effective for 2012

  • The following depreciation items are made effective for equipment placed in service from January 1, 2012 through December 31, 2014
    • 15-year life on qualified leasehold improvements, qualified restaurant buildings and qualified retail improvements.
    • Increased Section 179 limitations and the treatment of certain real estate property as eligible for Section 179 treatment.
  • The Research and Development Tax Credit is revived for 2012 and extended through 2013.
  • 100% exclusion of gain from the sale of qualified small business stock is in place for shares acquired before January 1, 2014.

Now comes the scramble of the states to choose whether to go along with the changes made by the Federal government, and the IRS and tax preparation software providers to update their systems and get the changes rolled out.  We’ll keep you up to date on when we can start getting 2012 tax returns prepared.

Questions Remain on Business Tax Issues

As the end of the year approaches, there are a significant number of tax breaks and deductions remaining in limbo for businesses.  Congress and the President are working to resolve these and many others before the end of the year, which is now a short three weeks away.

Below are some of those most likely to affect our readers.

  • The 50% bonus depreciation allowance for new equipment expires at the end of 2012.
  • The Research and Development Tax Credit, which expired at the end of 2011.
  • The 15-year depreciable life for qualified leasehold, restaurant and retail improvements, which expired at the end of 2011.
  • The Section 179 deduction, which allowed up to $139,000 in deductions for capital equipment placed in service in 2011, will be reduced to $25,000 (plus a small inflation increase) for 2012.

These are in addition to the individual items covered in last week’s blog posting.

The acting commissioner of the IRS has warned Congress several times that failure to resolve the expired and expiring provisions by the end of the year may delay the filing of most business and individual tax returns.  Even if Congress and the President reach an agreement by year end, there may still be delays as the IRS rushes to update their computer systems, along with tax software providers.

To add to the complexity and uncertainty, most states use some form of the taxable income amount determined on the federal tax return as a starting point for state taxes.  This means once the federal tax code is determined, the states will have to scramble to adopt all, some, or none, of the new federal laws and also retool their computer systems for the changes.

We’ll be keeping up on the latest, and as always, we’re here to help you navigate the ever-changing landscape.

Fiscal Cliff Update

As we near the end of the year, there are a large number of things still in flux, mostly related to the so-called “Fiscal Cliff” of tax increases and spending cuts.  Congress and the President are negotiating to avoid the Cliff, since most believe allowing the country to “go over” would push the economy back into recession.

What does this mean to you, you might ask?  Below is a list of the benefits that are already expired for 2012 (or will expire at the end of this year) unless Congress acts to reinstate them.  This is just a partial list of the items most likely to effect the average taxpayer.

  • The 10% tax bracket for the lowest income Americans moves to 15%.
  • The highest tax bracket will move from 35% to 39.6%
  • Interest and dividends will be taxed at ordinary income tax rates, rather than a maximum tax rate of 15%
  • Capital gains will be taxed at a maximum of 20%, rather than the current maximum of 15%.
  • Nearly 26 million more Americans will pay the “Alternative Minimum Tax” or AMT, which eliminates many tax deductions otherwise available and uses only two tax rates – 26% and 28% – to calculate Federal tax.
  • Adoption benefits provided by employers to assist employees with the cost of adoption will no longer be excluded from taxable income.
  • Tax-free tuition assistance provided by employers to their employees of up to $5,250 will not be allowed.
  • The 2% reduction of the employee’s portion of Social Security will expire, essentially reducing take-home pay by 2% for those earning up to $113,700.
  • The up-to $4,000 deduction for tuition and fees will not be allowed.
  • Mortgage insurance premiums will no longer be allowed as a deduction.
  • State and local sales taxes will not be allowed as a deduction in place of state and local income taxes, a provision that effects mostly those in states with no state income tax.

We’ll keep an eye toward Washington, and when there is a resolution to the Fiscal Cliff questions, we’ll bring you a full explanation.

2013 FSA Limits

The 2010 Health Care Act made changes to the amount of contributions allowed to be made to Flexible Spending Accounts (FSA) for medical expenses. For plan years starting in 2013, the maximum FSA contribution for medical expenses is $2,500.  The limitation will be indexed annually for inflation.