No More Fiscal Cliff – Major Tax Law Changes for Individuals and Businesses in 2013

Here is a summary of some of the major tax law changes for 2013 included in Congress’s fiscal cliff legislation:

Individuals:

1. The AMT exemption will be extended on a permanent basis. The AMT Exemption amount will be adjusted for inflation annually and will be retroactive to 2012.
2. The employee’s share of Social Security Tax  (FICA) will increase to 6.2% from 4.2% as this payroll tax reduction was not extended.
3. A maximum tax rate of 39.6% will be imposed on individuals with taxable income of more than $400,000 ($450,000 for married filing jointly).
4. The maximum capital gains tax rate and qualified dividend rate will rise from 15% to 20% for individuals making more than $400,000 ($450,000 for married filing jointly).
5. The itemized deduction and personal exemption phase-outs are reinstated, but the starting thresholds were increased to $300,000 and $250,000 for married couples and single filers, respectively.
6. The following legislation will be extended  from 2012 to 2013:

•  Qualified principal residence debt relief exclusion
• $250 income tax deduction from adjusted gross income for teacher classroom expenditures
• Mortgage insurance premium deduction ( will continue being deductible as as personal residence mortgage interest)
• State and local sales tax deduction
• Tuition deduction
• The exclusion for contributing to a charity directly from an IRA (also special provision allowing transfers made in January 2013 to be treated as made in 2012)

Business Provisions:

1. Section 179 deduction limitation is $500,000 for 2012 and 2013. The maximum amount that can be spent on fixed assets before section 179 deduction begins to phase out is $2,000,000.
2. The following legislation will be extended  from 2012 to 2013:

• The Research and Experimentation Tax Credit
• Qualified real property depreciation of 15 years and section 179 deduction on specific items
• 50% bonus depreciation
• The Work Opportunity Tax Credit

Estate and gift Provision:

1. The $5 million exemption, adjusted for inflation, will stay in place.  However, the tax rate on taxable estates will increase to 40% in 2013 (the 2012 rate was 35%).  The exemption for 2013 is $5,250,000.

Personal Tax Credits:

1. The following legislation will extend to 2013:

• The Child Tax Credit of $1,000 per child
• The enhanced Earned Income Tax Credit
• The enhanced American Opportunity College Tuition Tax Credit

For more information about how major tax law changes for 2013 effects you and your business call LSL CPAs at  714.569.1000.

By Hadar Hommel, CPA