Individual Provisions of new law:
High income taxpayers face a tax rate increase. This is because the old maximum rate was 35%, and for 2013 forward, the new maximum rate is 39.6%. This rate kicks in with taxable income over $400,000 for single taxpayers ($450,000 for married filing jointly). The lower Bush-era tax rates are preserved at lower taxable income levels.
On dividends and capital gains, the new tax act raises the top rate from 15% to 20% for those who are subject to the new 39.6% bracket. The old 15% rate is retained for most others, along with the zero rate for taxpayers in the 10% and 15% brackets.
Also, personal exemptions and itemized deductions of high-income taxpayers will be subject to phase-out. These thresholds are based upon adjusted gross income, not taxable income, and start at $250,000 for single taxpayers and $300,000 for married filing jointly. These lower thresholds mean a “back door” tax increase for many who still retain the benefit of the Bush-era marginal tax rates.
The alternative minimum tax (AMT) has been reigned in as part of the new act and that is a strong positive. The AMT exemption amounts will be adjusted upward for 2012 and forward and further adjusted upward by an inflation index in subsequent years. This should remove most taxpayers from the reach of AMT, including a whopping estimate of 60 million taxpayers for 2012.
There were many other individual provisions extended, including the deduction for state and local sales tax in lieu of state income tax, the child tax credit, and various credits and deductions related to qualified tuition and other expenses of higher education. The act also extended a popular provision through 2013 allowing tax-free distributions from IRAs to charities by those 70 ½ or older, up to a maximum of $100,000 per taxpayer.
One big item that was not extended was the 2% payroll tax reduction for employees and self-employed individuals. The reduction had been in effect for both 2011 and 2012. It is this provision that has led many to call the new law a tax increase on most Americans, and it will reduce take-home pay for virtually all workers.
Estate and Gift Tax:
On estate and gift taxes, the current exemption amount will remain at $5,000,000 per person, indexed for inflation. Spouses will be permitted portability permanently, and this means a married couple can effectively shield up to $10 million, indexed for inflation. This was all controversial, and the price was an increase in the tax rate on taxable estates and gifts above these amounts from 35% to 40% starting in 2013.
On the business tax front, several key provisions were extended for one year only through 2013. First, 50% bonus depreciation on many classes of new property was continued. Also, enhanced Section 179 business expensing up to $500,000 was extended for a year. The shorter 15-year straight-line depreciation method for qualified leasehold, restaurant and retail improvements was extended. And, popular tax credits for research and development and various energy efficiencies, along with the new markets tax credit and work opportunity tax credits, received a 1-year reprieve.
The rationale for not extending the business provisions past 2013 was the idea of undertaking fundamental business tax reform this year. The President, congressional leaders, and many business executives have expressed interest in this, and it bears watching as 2013 unfolds.
Comprehensive tax reform would be a huge job. Further, no new progress was made post-election on the spending side of the ledger. Tough budget cuts were postponed again for two months, which is just coincidentally when the U.S. government finally runs out of money and borrowing authority.
IRS HAS DELAYED FILING 2012 TAX RETURNS
IRS Plans Jan. 30 Tax Season Opening For 1040 Filers
Following the January tax law changes made by Congress under the American Taxpayer Relief Act (ATRA), the Internal Revenue Service announced today it plans to open the 2013 filing season and begin processing individual income tax returns on Jan. 30.
The IRS will begin accepting tax returns on that date after updating forms and completing programming and testing of its processing systems. This will reflect the bulk of the late tax law changes enacted Jan. 2. The announcement means that the vast majority of tax filers — more than 120 million households — should be able to start filing tax returns starting Jan 30.
The IRS estimates that remaining households will be able to start filing in late February or into March because of the need for more extensive form and processing systems changes. This group includes people claiming residential energy credits, depreciation of property or general business credits. Most of those in this group file more complex tax returns and typically file closer to the April 15 deadline or obtain an extension.
We have worked hard to open tax season as soon as possible, IRS Acting Commissioner Steven T. Miller said. This date ensures we have the time we need to update and test our processing systems.
The IRS will not process paper tax returns before the anticipated Jan. 30 opening date. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit.
The best option for taxpayers is to file electronically, Miller said.
The opening of the filing season follows passage by Congress of an extensive set of tax changes in ATRA on Jan. 1, 2013, with many affecting tax returns for 2012. While the IRS worked to anticipate the late tax law changes as much as possible, the final law required that the IRS update forms and instructions as well as make critical processing system adjustments before it can begin accepting tax returns.
The IRS originally planned to open electronic filing this year on Jan. 22; more than 80 percent of taxpayers filed electronically last year.
Who Can File Starting Jan. 30?
The IRS anticipates that the vast majority of all taxpayers can file starting Jan. 30, regardless of whether they file electronically or on paper. The IRS will be able to accept tax returns affected by the late Alternative Minimum Tax (AMT) patch as well as the three major extender provisions for people claiming the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.
Who Cant File Until Later?
There are several forms affected by the late legislation that require more extensive programming and testing of IRS systems. The IRS hopes to begin accepting tax returns including these tax forms between late February and into March; a specific date will be announced in the near future.
The key forms that require more extensive programming changes include Form 5695 (Residential Energy Credits), Form 4562 (Depreciation and Amortization) and Form 3800 (General Business Credit). A full listing of the forms that wont be accepted until later is available on IRS.gov.
As part of this effort, the IRS will be working closely with the tax software industry and tax professional community to minimize delays and ensure as smooth a tax season as possible under the circumstances.
Updated information will be posted on IRS.gov.