Tax Season Update

Tax season moves quickly, and at the end of this week, there will be a short four weeks left until the individual tax deadline is upon us.   There have been a number of developments since our last posting, so below you’ll find some of the highlights you may have missed.

  • The IRS has gotten its computer systems up to date with the “Fiscal Cliff” legislation, passed in early January. This means all tax returns can now be filed, as the final forms have been released, and tax software providers have gotten their updates in place. This is a full three weeks faster than anyone expected.
  • Intuit, the maker of TurboTax, as well as several professional-grade tax software programs, ran into significant issues with the Minnesota tax return, leading to about 10,000 tax returns being delayed. Intuit had until today to get the issues corrected, and says they have notified anyone who was affected.  We use a different software provider.  This is a great example of the importance of having a tax professional working for you – the software can’t always be trusted to get the right result.
  • Governor Dayton removed the “business to business” sales tax from his proposed budget, which is great news. If left in place, professional services, like accounting and legal services would have been subject to sales tax.
  • The Standard Mileage Rate for business miles driven in 2013 is 56.5 cents per mile.

Corporate taxes are due by this Friday, March 15th, and as always, we’re here to help with your tax and accounting needs.

Fiscal Cliff – Part 2

Last week we covered the changes for the 2012 tax year created by the bill to avoid the tax portion of the fiscal cliff.  This week we’ll cover the changes that apply for 2013 and years after, as well as some of the less common provisions of the bill.

Tax Rates and Deductions

Beginning with the 2013 tax year, the following changes have been made to the individual tax rates, deductions and exemptions.

Tax Rates. Starting with 2013, income over $400,000 for single people and $450,000 for married couples will be taxed at 39.6% rather than the old 35% maximum rate.  All other tax rates are unchanged.

Capital Gain and Dividend Rates. The top tax rate for this income moves from 15% to 20%, with the 20% rate applying to single filers with more than $400,000 and $450,000 for married couples.  Those in the 10% and 15% brackets will continue to see this income taxed a 0%.

Those in a 25% or greater bracket, but with incomes less than the thresholds mentioned above will see a tax rate of 15%.

This is in addition to the 3.8% Medicare Surtax applied to investment income of those with $200,000 single or $250,000 married filing joint or more under the Affordable Care Act.

Deductions and Exemptions. For taxpayers with incomes above $250,000 single or $300,000 married filing joint, the following changes are effective for 2013 and years after:

  • Personal exemptions will be reduced by 2% for each $2,500 of income above the threshold amounts.
  • Itemized deductions will be reduced by 3% of the amount of income over the threshold amounts, with the maximum reduction not exceeding 80% of itemized deductions.

Estates and Gifts

The estate exemption is permanently increased to $5 million and indexed for inflation, and the portability of unused exemption amounts from one spouse to another is continued.  The top tax rate for estates and gifts increases from 35% to 40%.  These provisions are in place for deaths and gifts occurring after 2012.

Debt Discharge Income

The exclusion of up to $2 million of debt discharge income related to a principal residence is also extended through the end of 2014.

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.

Year End Reminders

With just a few days left of 2012, now is a good time to be sure you’ve done everything you need to before the year is over.  Below is a list of common items to be sure you’ve thought about before the clock strikes midnight on New Year’s Eve.

  • Be sure you’ve used up any funds in your Flexible Spending Account (FSA), or have a plan to do so in the first few months of next year if your plan allows it.
  • Consider sending in your 4th quarter state estimated tax payment early, so you can deduct it this year.
  • Make any last donations, document your giving, and gather up your donation receipts.
  • Consider making your January mortgage payment in December instead.  This will shift the interest on that payment into this year, which you can deduct this year.
  • If you’re able, be sure you’ve maxed out your retirement plan contributions for the year.

From all of us to all of you, have a safe and enjoyable New Year!

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.