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  1. 2013 Payroll Tax Rates & New Wage Limits

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    The following are the changes in payroll taxes effective January 1, 2013:

    Employee Withholdings Rate Taxable Wage Base Per Person
    Social Security 6.2% Maximum wages: $113,700
    Medicare 1.45% No limit
    Additional Medicare Tax 0.9% Wages over $200,000
    Federal Withholding Use withholding tables in Publication 15 dated
    January, 2013
    RI Withholding Use withholding tables in RI Booklet dated
    January, 2013
    TDI 1.2% Maximum wages: $61,400
    Employer Payroll Taxes
    Social Security 6.2% Maximum wages: $113,700
    Medicare 1.45% No limit
    SUTA Assigned rate* Maximum wages: $20,200
    New Employer Rate SUTA 2.83% Maximum wages: $20,200
    JDF 0.51% Maximum wages: $20,200
    FUTA 0.6% Maximum wages: $ 7,000
    RI Additional 0.3%

     

    *DET will let you know what your SUTA rate is by January, 2013.

    If you have any questions, please contact us.

     

     

  2. New Taxpayer Relief Act for Businesses

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    Business Tax Breaks Retroactively Reinstated and Extended by the 2012 Taxpayer Relief Act

    On Jan. 1, 2013, Congress passed the American Taxpayer Relief Act (2012 Taxpayer Relief Act), which the President has vowed to sign as soon as it is ready for his signature. The 2012 Taxpayer Relief Act will prevent many of the tax hikes that were scheduled to go into effect this year and retain many favorable tax breaks that were scheduled to expire, but will also increase income taxes for some high-income individuals and slightly increase transfer tax rates from 2012 levels. Further, it extends a host of expired and expiring tax breaks for businesses and individuals.

    The 2012 Taxpayer Relief Act retroactively reinstates and extends for two years a host of business tax breaks, including: the research credit; generous Code Sec. 179 expensing and phaseout limits; the new markets tax credit; employer wage credit for activated reservists; 15-year writeoff for qualifying leasehold improvements, restaurant buildings and improvements, and retail improvements; enhanced charitable deductions for contributions of food inventory; and empowerment zone tax incentives. It also covers the Act’s one-year extension of 50% bonus first-year depreciation.

    Research Credit Reinstated and Liberalized

    New law. The 2012 Taxpayer Relief Act retroactively extends the research credit for two years so that it applies for amounts paid or accrued before Jan. 1, 2014.

    For tax years beginning after Dec. 31, 2011, the 2012 Taxpayer Relief Act liberalizes the research credit rules for persons that acquire the major portion of either a trade or business or a separate unit of a trade or business of another person. Here, for purposes of calculating the allowable research credit, the amount of qualified research expenses paid or incurred by the acquiring person during the measurement period is increased by certain expenses of the predecessor, and the gross receipts of the acquiring person for such period is increased by certain gross receipts of the predecessor. The measurement period is, with respect to the tax year of the acquiring person for which the research credit is determined, any period of the acquiring person preceding such tax year which is taken into account for purposes of determining the credit for such year.

    The 2012 Taxpayer Relief Act also revises the rules for allocating the research credit among members of a controlled group or members of a group of commonly controlled trades or businesses. For tax years beginning after Dec. 31, 2011, the credit for each member of a controlled group is determined on a proportionate basis to its share of the aggregate of the qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums, taken into account by such controlled group for purposes of the research credit.  A similar rule applies to members of a group of commonly controlled trades or businesses.

    Bonus First-Year Depreciation Extended for One Year

    Under pre-Act law, the Code Sec. 168(k) additional first-year depreciation deduction (also called bonus first-year depreciation) generally is allowed equal to 50% of the adjusted basis of qualified property acquired and placed in service after Dec. 31, 2011, and before Jan. 1, 2013 (before Jan. 1, 2014 for certain longer-lived and transportation property). The additional first-year depreciation deduction is allowed for both regular tax and alternative minimum tax (AMT) purposes, but is not allowed for purposes of computing earnings and profits. The basis of the property and the depreciation allowances in the year of purchase and later years are appropriately adjusted to reflect the additional first-year depreciation deduction. A taxpayer may elect out of additional first-year depreciation for any class of property for any tax year.

    In general, an asset qualifies for the bonus depreciation allowance if:

    … It falls into one of the following categories: property to which the modified accelerated cost recovery system (MACRS) rules apply with a recovery period of 20 years or less; computer software other than computer software covered by Code Sec. 197; qualified leasehold improvement property; or certain water utility property.

    … It is placed in service before Jan. 1, 2013. (Certain long-production-period property and certain transportation property may be placed in service before Jan. 1, 2014)

    … Its original use commences with the taxpayer. Original use is the first use to which the property is put, whether or not that use corresponds to the taxpayer’s use of the property.

    New law. The 2012 Taxpayer Relief Act extends 50% first-year bonus depreciation so that it applies to qualified property acquired and placed in service before Jan. 1, 2014 (before Jan. 1, 2015 for certain longer-lived and transportation property).  A conforming change is made relating to 50% bonus depreciation not being taken into account as a cost in applying the percentage of completion method for certain long-term contracts.

    The 2012 Taxpayer Relief Act also retroactively revives and extends through 2013 the rule treating qualified leasehold improvement property as 15-year property. Thus, such property is eligible for a bonus 50% first-year depreciation deduction if placed in service before Jan. 1, 2014.

    The 2012 Taxpayer Relief Act also extends through 2013 the rule treating qualified restaurant property as 15-year property and the rule treating qualified retail improvement property as 15-year property. These types of property also are eligible for 50% bonus first-year depreciation if they also meet the definition of qualified leasehold improvement property.

    First-Year Depreciation Cap for 2013 Autos and Trucks Boosted by $8,000

    Under the luxury auto dollar limits, depreciation deductions (including Code Sec. 179 expensing) that can be claimed for passenger autos are subject to dollar limits that are annually adjusted for inflation. For passenger automobiles placed in service in 2012, the adjusted first-year limit is $3,160. For light trucks or vans, the adjusted first-year limit is $3,360. Light trucks or vans are passenger automobiles built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis that are subject to the limits because they are rated at 6,000 points gross (loaded) vehicle weight or less.

    The applicable first-year depreciation limit is increased by $8,000 (not indexed for inflation) for any passenger automobile that is “qualified property” under the bonus depreciation rules and which isn’t subject to a taxpayer election to decline bonus depreciation.

    New law. The 2012 Taxpayer Relief Act provides that the placed-in-service deadline for “qualified property” is Dec. 31, 2013 (Dec. 31, 2014 for aircraft and long-production-period property).

    Thus, for a passenger auto that is qualified property (and isn’t subject to the election to decline bonus depreciation and AMT depreciation relief), the 2012 Taxpayer Relief Act extends the placed-in-service deadline for the $8,000 increase in the first-year depreciation limit from Dec, 31, 2012 to Dec. 31, 2013.

    T, a calendar year taxpayer, places a new $40,000 vehicle into service in his business on Jan. 5, 2013. Assume that: (1) the vehicle is an auto that is “qualified property” (and an election to decline bonus depreciation and AMT depreciation relief doesn’t apply to the vehicle); and (2) the passenger auto first-year allowances remain unchanged for 2013. T is allowed first-year depreciation for 2013 of $11,160 ($3,160 presumed general first-year allowance for 2013 plus $8,000). If the vehicle were instead a light truck or van, T is allowed first-year depreciation for 2013 of $11,360 (the presumed $3,360 general first-year allowance for 2013 plus $8,000).

    Extended Choice to Forego Bonus Depreciation and Claim Credits Instead

    New law. For property laced in service after Dec. 31, 2012, in tax years ending after that date, the 2012 Taxpayer Relief Act provides an option to corporations with respect to “round three extension property,” generally, property newly eligible for 50% bonus first year depreciation under the 2012 Taxpayer Relief Act’s one-year extension provision, i.e., property placed in service after 2012 and before 2014 (before 2015 for the aircraft and long-production-period property). A corporation is permitted to increase the AMT credit limitation (but not the research credit limitation) by the bonus depreciation amount with respect to certain property placed in service.

    Boosted Expensing Amounts for 2013

    Under Code Sec. 179, a taxpayer, other than an estate, a trust, or certain noncorporate lessors, can elect to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer’s trade or business. The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of Code Sec. 179 property placed in service during the tax year in excess of a specified investment ceiling. Amounts ineligible for expensing due to excess investments in expensing-eligible property can’t be carried forward and expensed in a subsequent year. Rather, they can only be recovered through depreciation. The amount eligible to be expensed for a tax year can’t exceed the taxable income derived from the taxpayer’s active conduct of a trade or business. And any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years.

    New law. Retroactively effective for tax years beginning in 2012, the 2012 Taxpayer Relief Act increases the maximum expensing amount under Code Sec. 179 from $139,000 to $500,000. Effective for tax years beginning in 2013, the 2012 Taxpayer Relief Act increases the maximum expensing amount under Code Sec. 179 from $25,000 to $500,000. The 2012 Taxpayer Relief Act also increases the investment-based phaseout amount for tax years beginning in 2012 or 2013 to $2,000,000. However, for tax years beginning after 2013, the maximum expensing amount is scheduled to drop to $25,000 and the investment-based phaseout amount is scheduled to drop to $200,000.

    The retroactive boost for tax years beginning in 2012 amounts to a windfall for eligible taxpayers that placed in service more than $139,000 of eligible property.

    The Act also provides that:

    … Off-the-shelf computer software is expensing-eligible property if placed in service in a tax year beginning before 2014 (a one-year extension).

    … For tax years beginning before 2014 (also a one-year extension), an expensing election or specification of property to be expensed may be revoked without IRS’s consent. But, if such an election is revoked, it can’t be reelected.

    … For any tax year beginning in 2010, 2011, 2012, or 2013 (a two-year extension) up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) is eligible for expensing under Code Sec. 179.

    15-Year Writeoff for Qualified Leasehold and Retail Improvements and Restaurant Property Reinstated and Extended

    New law. The 2012 Taxpayer Relief Act retroactively extends for two years the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year MACRS class. Such property qualifies for 15-year recovery if it is placed in service before Jan. 1, 2014.

    7-Year Writeoff for Motorsport Racing Track Facilities Reinstated and Extended

    New law. The 2012 Taxpayer Relief Act retroactively extends the 7-year straight line cost recovery period for motorsports entertainment complexes for two years. The quick writeoff applies to qualifying motorsports entertainment complexes placed in service through Dec. 31, 2013.

    Work Opportunity Tax Credit Extended

    The work opportunity tax credit (WOTC) allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). Where the employee is a long-term family assistance (LTFA) recipient, the WOTC is a percentage of first and second year wages, up to $10,000 per employee. Generally, the percentage of qualifying wages is 40% of first-year wages; it’s 25% for employees who have completed at least 120 hours, but less than 400 hours of service for the employer. For LTFA recipients, it includes an additional 50% of qualified second-year wages.

    The maximum WOTC for hiring a qualifying veteran generally is $6,000. However, it can be as high as $12,000, $14,000, or $24,000, depending on factors such as whether the veteran has a service-connected disability, the period of his or her unemployment before being hired, and when that period of unemployment occurred relative to the WOTC-eligible hiring date.

    Under pre-Act law, wages for purposes of the WOTC doesn’t include any amount paid or incurred to: (1) a non-veteran who began work after Dec. 31, 2011; or (2) a veteran who began work after Dec. 31, 2012.

    New law. The 2012 Taxpayer Relief Act retroactively extends the WOTC so that it applies to eligible veterans and nonveterans who begin work for the employer before Jan. 1, 2014.

    Thus, the 2012 Taxpayer Relief Act grants a two-year lease on life for the WOTC for eligible nonveterans, and a one-year lease on life for the WOTC for qualifying veterans.

    Indian Employment Credit Reinstated and Extended

    The Indian employment credit is 20% of the excess, if any, of the sum of qualified wages and qualified employee health insurance costs (not in excess of $20,000 per employee) paid or incurred (other than paid under salary reduction arrangements) to qualified employees (enrolled Indian tribe members and their spouses who meet certain requirements) during the tax year, over the sum of these same costs paid or incurred in calendar year ’93.

    New law. The 2012 Taxpayer Relief Act retroactively extends the Indian employment credit for two years. It now applies to tax years beginning before Jan. 1, 2014.

    Differential Wage Payment Credit for Employers Reinstated and Extended

    Eligible small business employers that pay differential wages—payments to employees for periods that they are called to active duty with the U.S. uniformed services (for more than 30 days) that represent all or part of the wages that they would have otherwise received from the employer—can claim a credit equal to 20% of up to $20,000 of differential pay made to an employee during the tax year. An eligible small business employer is one that: (1) employed on average less than 50 employees on business days during the tax year; and (2) under a written plan, provides eligible differential wage payments to each of its qualified employees. A qualified employee is one who has been an employee for the 91-day period immediately preceding the period for which any differential wage payment is made.

    New law. The 2012 Taxpayer Relief Act retroactively extends the credit for two years. It applies for differential wages paid through Dec. 31, 2013.

    Enhanced Deduction for Food Inventory Reinstated and Extended

    A C corporation may claim an enhanced charitable contribution deduction equal to the lesser of (a) basis plus half of the property’s appreciation, or (b) twice the property’s basis, for contributions of food inventory that was apparently wholesome food, i.e., meant for human consumption and meeting certain quality and labeling standards. The enhanced contribution is also available for a taxpayer other than a C corporation, but the aggregate amount of contributions of apparently wholesome food that may be taken into account for the tax year can’t exceed 10% of the taxpayer’s aggregate net income for that tax year from all trades or businesses from which those contributions were made for that tax year.

    New law. The 2012 Taxpayer Relief Act retroactively extends the apparently wholesome food contribution rules for two years to include contributions made before Jan. 1, 2014.

    The 2012 Taxpayer Relief Act did not extend the enhanced deduction for charitable contributions of books (this deduction ceased to apply for contributions made after Dec. 31, 2011), or the enhanced deduction for corporate contributions of computer equipment for educational purposes (this deduction ceased to apply for contributions made during any tax year beginning after Dec. 31, 2011).

    New Markets Tax Credit Reinstated and Extended

    A new markets tax credit applies for qualified equity investments to acquire stock in a community development entity (CDE). The credit is: (1) 5% for the year in which the equity interest is purchased from the CDE and for the first two anniversary dates after the purchase (for a total credit of 15%), plus (2) 6% on each anniversary date thereafter for the following four years (for a total of 24%). Under pre-Act law, there was a $3.5 billion cap on the maximum annual amount of qualifying equity investments for 2010 and 2011; a carryover was allowed where the credit limitation for a calendar year exceeded the aggregate amount allocated for the year, but no amount could be carried over to any calendar year after 2016.

    New law. The 2012 Taxpayer Relief Act retroactively extends the new markets tax credit two years, through 2013. It provides that a $3.5 billion cap applies for 2010, 2011, 2012, and 2013, but no amount can be carried over to any calendar year after 2018.

    Expensing Election for Costs of Film and TV Production Extended

    Taxpayers may elect to expense production costs of qualified film and television (TV) productions in the U.S. Expensing doesn’t apply to the part of the cost of any qualifying film or TV production that exceeded $15 million for each qualifying production. The limit is $20 million if production expenses were “significantly incurred” in areas (1) eligible for designation as a low-income community or (2) eligible for designation by the Delta Regional Authority (a federal-state partnership covering parts of certain states) as a low-income community or isolated area of distress.

    New law. The 2012 Taxpayer Relief Act retroactively extends the expensing provision for two years. It applies for qualified film and TV productions beginning before Jan. 1, 2014.

    Allowance of Domestic Production Activities Deduction for Puerto Rico Reinstated and Extended

    The Code Sec. 199 domestic production activities deduction is available only if, among other conditions, the taxpayer has domestic production gross receipts (DPGR) from: (1) any sale, exchange or other disposition, or any lease, rental or license, of qualifying production property manufactured, produced, grown or extracted by the taxpayer in whole or in significant part within the U.S.; (2) any sale, exchange, etc., of qualified films produced by the taxpayer; (3) any sale, exchange or other disposition of electricity, natural gas, or potable water produced by the taxpayer in the U.S.; (4) construction activities performed in the U.S.; or (5) engineering or architectural services performed in the U.S. for construction projects located in the U.S.

    New law. The 2012 Taxpayer Relief Act retroactively extends the special domestic production activities rules for Puerto Rico for two years through 2013. Under the Act, the special domestic production activities rules for Puerto Rico apply for the first eight tax years of a taxpayer beginning after Dec. 31, 2005 and before Jan. 1, 2014.

    Subpart F Exception for Active Financing Income Reinstated and Extended

    Under pre-Act law, certain income from the active conduct of a banking, financing or similar business, or from the conduct of an insurance business (collectively referred to as “active financing income”), was temporarily excluded from the definition of Subpart F income, but only for tax years of foreign corporations beginning after Dec. 31, ’98 and before Jan. 1, 2012, and tax years of U.S. shareholders with or within which such tax years of foreign corporations end.

    New law. The 2012 Taxpayer Relief Act retroactively extends the exclusions for active financing income for two years. Thus, this rule applies to tax years of a foreign corporation beginning after Dec. 31, ’98 and before Jan. 1, 2014, and tax years of U.S. shareholders with or within which such tax years of foreign corporations end.

    Look-Through Rule for Payments Between Related CFCs under Foreign Personal Holding Company Income Rules Reinstated and Extended

    Under pre-Act law, for tax years beginning before Jan. 1, 2012, dividends, interest, rents, and royalties received by one controlled foreign corporation (CFC) from a related CFC were not treated as foreign personal holding company income (FPHCI) to the extent attributable or properly allocable to non-subpart-F income, or income that was not effectively connected with the conduct of a U.S. trade or business of the payor (look-through treatment).

    New law. The 2012 Taxpayer Relief Act retroactively extends look-through treatment for related CFCs for two years. Thus, the above rule applies to tax years of a foreign corporation before Jan. 1, 2014, and tax years of U.S. shareholders with or within which such tax years of foreign corporations end.

    Extension and Modification of Reduction in S Corp Recognition Period for Built-In Gains Tax

    An S corporation generally is not subject to tax, but instead passes through its income to its shareholders, who pay tax on their pro-rata shares of the S corporation’s income. Where a corporation that was formed as a C corporation elected to become an S corporation (or where an S corporation receives property from a C corporation in a nontaxable carryover basis transfer), the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election if the gain is recognized during a recognition period.

    Under pre-Act law, for S corporation tax years beginning in 2011, no tax is imposed on the net unrecognized built-in gain of an S corporation if the fifth year in the recognition period preceded the 2011 tax year.

    New law. The 2012 Taxpayer Relief Act provides that for determining the net recognized built-in gain for tax years beginning in 2012 or 2013, the recognition period is the 5-year period beginning with the first day of the first tax year for which the corporation was an S corporation. Additionally, effective for tax years beginning after Dec. 31, 2011, for S corporations that report gain from the sale of an asset under the installment method, the treatment of all payments received is governed by the provisions of Code Sec. 1374(d)(7) that apply to the tax year in which the sale was made.

    Temporary Exclusion of 100% of Gain on Certain Small Business Stock Extended

    A taxpayer may exclude all of the gain on the disposition of qualified small business stock acquired after Sep. 27, 2010 and before Jan. 1, 2012. Under pre-Act law, the exclusion was to be limited to 50% of gain for stock acquired after Dec. 31, 2011.

    New law. The 2012 Taxpayer Relief Act retroactively extends this provision for two years so that taxpayers may exclude 100% of gain from the disposition of qualified small business stock acquired after Sep. 27, 2010 and before Jan. 1, 2014. The 2012 Taxpayer Relief Act also makes certain technical amendments relevant to qualified small business stock acquired during earlier periods.

    Lower Shareholder Basis Adjustments for Charitable Contributions by S Corporations Reinstated and Extended

    Before the Pension Protection Act of 2006 (PPA), if an S corporation contributed money or other property to a charity, each shareholder took into account his pro rata share of the fair market value of the contributed property in determining his own income tax liability. The shareholder reduced his basis in his S stock by the amount of the charitable contribution that flowed through to him. The PPA amended this rule to provide that the amount of a shareholder’s basis reduction in S stock by reason of a charitable contribution made by the corporation is equal to his pro rata share of the adjusted basis of the contributed property.

    New law. The 2012 Taxpayer Relief Act retroactively extends the PPA rule for two years so that it applies for contributions made in tax years beginning before Jan. 1, 2014.

    Special Rule for Payments to a Charity From a Controlled Entity Reinstated and Extended

    For 2006–2011, interest, rent, royalties, and annuities paid to a tax-exempt organization from a controlled entity were excluded from the unrelated business taxable income (UBTI) of the tax exempt organization. Under pre-Act law, this exclusion didn’t apply to payments received or accrued after Dec. 31, 2011, and such payments were to be treated as UBTI to the extent that the payments reduce the “net unrelated income” of the controlled entity.

    New law. The 2012 Taxpayer Relief Act retroactively extends the special rule for two years so that it applies for payments received or accrued by a tax-exempt organization through Dec. 31, 2013.

    Empowerment Zone Tax Breaks Reinstated and Extended

    The designation of an economically depressed census tract as an “Empowerment Zone” renders businesses and individual residents within such a Zone eligible for special tax incentives. Under pre-Act law, Empowerment Zone designations expired on Dec. 31, 2011.

    New law. The 2012 Taxpayer Relief Act extends for two years, through Dec. 31, 2013, the period for which the designation of an empowerment zone is in effect. Thus, the Act extends for two years the empowerment zone tax incentives, including: the 20% wage credit under Code Sec. 1396; liberalized Code Sec. 179 expensing rules ($35,000 extra expensing and the break allowing only 50% of expensing eligible property to be counted for purposes of the investment based phaseout of expensing); tax-exempt bond financing under Code Sec. 1394; and deferral under Code Sec. 1397B of capital gains tax on sale of qualified assets sold and replaced.

    For a designation of an empowerment zone, the nomination for which included a termination date which is Dec. 31, 2011, termination shall not apply with respect to that designation if the entity which made such nomination amends the nomination to provide for a new termination date in such manner as IRS may provide.

    The Act also extends for two years, through Dec. 31, 2018, the period for which a higher percentage exclusion applies for certain qualified small business stock of empowerment zone businesses.

    Qualified Zone Academy Bond Limitation Extended

    Qualified zone academy bonds are qualified tax credit bonds designed to allow low-income populations to save on interest costs associated with public financing school renovations, repairs, and teacher training. For 2011, the national bond volume limitation on qualified zone academy bonds was $400 million. Under pre-Act law, except for carryovers of unused issuance limitations, the limit for years after 2011 was zero.

    New law. The 2012 Taxpayer Relief Act provides that the national bond volume limitation is $400 million for 2011, 2012, and 2013.

    Exemption for RIC Interest-Related Dividends and Short-Term Capital Gains Dividends Reinstated and Extended

    Under pre-Act law, a regulated investment company (RIC) could designate and pay (1) interest-related dividends out of interest that would generally not be taxable when received directly by a nonresident alien individual or foreign corporations and (2) short-term capital gains dividends out of short-term capital gains. RIC dividends designated as interest-related dividends and short-term capital gains dividends were generally not taxable when received by a nonresident alien individual or foreign corporation and weren’t subject to the withholding tax imposed on nonresident alien individuals and foreign corporations.

    New law. The 2012 Taxpayer Relief Act retroactively extends for two years the rules exempting from gross basis tax and withholding tax the interest-related dividends and short term capital gain dividends received from a RIC, for dividends with respect to tax years of a RIC beginning before Jan. 1, 2014.

    Treatment of RIC As Qualified Investment Entity Reinstated and Extended

    Gain from the disposition of a U.S. real property interest (USRPI) by a foreign person is treated as income effectively connected with a U.S. trade or business and is subject to tax and to Code Sec. 1445 withholding under Foreign Investment in Real Property Tax Act (FIRPTA) provisions. A USRPI does not include an interest in a domestically controlled “qualified investment entity.” Under pre-Act law, before Jan. 1, 2012, a RIC that met certain requirement could be treated as a “qualified investment entity.”

    New law. The 2012 Taxpayer Relief Act extends the inclusion of a RIC within the definition of a “qualified investment entity” for two years, through 2013. The change made by the Act. takes effect on Jan. 1, 2012, but the 2012 Tax Relief Act doesn’t impose a withholding requirement under Code Sec. 1445 for any payment made before the enactment date of the 2012 Tax Relief Act. A RIC that withheld and remitted tax under Code Sec. 1445 on distributions made after Dec. 31, 2011 and before the enactment date of the 2012 Tax Relief Act, isn’t liable to the distributee for such withheld and remitted amounts.

    Miscellaneous Other Provisions Extended

    The 2012 Taxpayer Relief Act retroactively extends:

    • the railroad track maintenance credit for two years; it now applies for tax years beginning before Jan. 1, 2014.
    • the mine rescue team training credit for two years; it will terminate for tax years beginning after Dec. 31, 2013.
    • accelerated depreciation for qualified Indian reservation property for two years for property placed in service through 2013.
    • the election to expense 50% of the cost of advanced mine safety equipment for two years through 2013.
    • the increase in the limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands for two years through 2013.
    • tax exempt bond financing for the New York Liberty Zone for two years; such bonds can be issued before Jan. 1, 2014.

     

    © 2013 Thomson Reuters/RIA. All rights reserved.

     

  3. New Taxpayer Relief Act for Individuals

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    2012 Taxpayer Relief Act Protects Key Individual Tax Breaks

    On Jan. 1, 2013, Congress passed the American Taxpayer Relief Act (2012 Taxpayer Relief Act), which the President has vowed to sign as soon as it is ready for his signature. The 2012 Taxpayer Relief Act will prevent many of the tax hikes that were scheduled to go into effect this year and retain many favorable tax breaks that were scheduled to expire, but will also increase income taxes for some high-income individuals and slightly increase transfer tax rates from 2012 levels. Further, it extends a host of expired and expiring tax breaks for individuals.

    Elimination of EGTRRA Sunsetting

    The provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), other than those made permanent or extended by subsequent legislation, were set to sunset and no longer apply to tax or limitation years beginning after 2010. (Sec. 901 of EGTRRA) However, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act) extended the EGTRRA provisions for two additional years. Thus, under pre-2012 Taxpayer Relief Act law, beginning in 2013, the EGTRRA sunset (as extended) would have wiped out a host of favorable tax rules, such as: favorable income tax rate structure for individuals; marriage penalty relief; and liberal education-related deduction rules.

    New law. The 2012 Taxpayer Relief Act eliminates the provision in EGTRRA that calls for its provisions to sunset. Accordingly the provisions in EGTRRA are made permanent and no longer automatically sunset in future years.

    Reduced Individual Tax Rates Except for Higher-Income Taxpayers

    New law. For tax years beginning after 2012, the income tax rates for most individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6% as would have occurred under the EGTRRA sunset). However, a 39.6% rate will apply for income above a certain threshold (specifically, income in excess of the “applicable threshold” over the dollar amount at which the 35% bracket begins). The applicable threshold is $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. These dollar amounts are inflation-adjusted for tax years after 2013.

    In addition, with the elimination of the EGTRRA sunset, the size of the 15% tax bracket for joint filers and qualified surviving spouses remains at 200% of the 15% tax bracket for individual filers.

    Reduced Capital Gains & Qualified Dividends Rate Except for Higher-Income Taxpayers

    New law. For tax years beginning after 2012, the 2012 Taxpayer Relief Act eliminates the provision in JGTRRA that provides for its provisions to sunset. Accordingly the provisions in JGTRRA are made permanent and no longer automatically sunset in future years.

    For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). When accounting for the 3.8% surtax on investment-type income and gains for tax years beginning after 2012, the overall rate for higher-income taxpayers will be 23.8%.

    For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will permanently be subject to a 0% rate. Taxpayers who are subject to a 25%-or-greater rate on ordinary income, but whose income levels fall below the $400,000/$450,000 thresholds, will continue to be subject to a 15% rate on capital gains and dividends. The rate will be 18.8% for those subject to the 3.8% surtax (i.e, those with modified adjusted gross income (MAGI) over $250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

    No Phase-Out of Personal Exemptions Except for Higher-Income Taxpayers

    New law. For tax years beginning after 2012, the Personal Exemption Phaseout (PEP), which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Under the phaseout, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer’s AGI exceeds the applicable threshold. These dollar amounts are inflation-adjusted for tax years after 2013.

    No 3%/80% Limitation on Itemized Deductions Except for Higher-Income Taxpayers

    New law. For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the “Pease“ limitation on itemized deductions, which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Thus, for taxpayers subject to the “Pease” limitation, the total amount of their itemized deductions is reduced by 3% of the amount by which the taxpayer’s adjusted gross income (AGI) exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. These dollar amounts are inflation-adjusted for tax years after 2013.

    AMT Exemption Permanently Increased With Indexing

    The alternative minimum tax (AMT) is the excess, if any, of the tentative minimum tax for the year over the regular tax for the year. In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount (which phases out at higher income levels). The result is alternative minimum taxable income (AMTI), which is subject to an AMT rate of 26% or 28%.

    New law. Retroactively effective for tax years beginning after 2011, the Act permanently increases the AMT exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. In addition, for tax years beginning after 2012, it indexes these exemption amounts for inflation.

    Personal Nonrefundable Credits May Offset AMT and Regular Tax for All Tax Years

    Nonrefundable personal credits—other than the adoption credit, the child credit, the savers’ credit, the residential energy efficient property credit, the non-depreciable property portions of the alternative motor vehicle credit, the qualified plug-in electric vehicle credit, and the new qualified plug-in electric drive motor vehicle credit—were to be allowed for 2012 only to the extent that the individual’s regular income tax liability exceeded his tentative minimum tax, determined without regard to the minimum tax foreign tax credit.

    Thus, under pre-Act law, many nonrefundable personal credits couldn’t offset AMT. The AMT could also indirectly limit a taxpayer’s nonrefundable personal tax credits even in situations where the taxpayer wasn’t liable for the AMT.

    New law. Retroactively effective for tax years beginning after 2011, the Act permanently allows an individual to offset his entire regular tax liability and AMT liability by the nonrefundable personal credits.

    The rule allowing nonrefundable personal credits to reduce the AMT (as well as regular tax) benefits middle income individuals who: (a) have low taxable income (and thus a low regular tax), e.g., because of a large number of personal exemptions; (b) are subject to the AMT because personal exemptions (as well as the standard deduction and certain itemized deductions) generally are not allowed in computing the AMT; and (c) have substantial nonrefundable personal credits.

    Individual Tax Breaks Retroactively Reinstated and Extended by the 2012 Taxpayer Relief Act

    Above-the-Line Deduction for Educator Expenses Reinstated and Extended

    Eligible elementary and secondary school teachers may claim an above-the-line deduction for up to $250 per year of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom.

    New law. The 2012 Taxpayer Relief Act retroactively extends the educator expense deduction for two years so that it applies to expenses paid in incurred in tax years 2012 and 2013.

    Exclusion for Discharged Home Mortgage Debt Extended

    Discharge of indebtedness income from qualified principal residence debt, up to a $2 million limit ($1 million for married individuals filing separately) is excluded from gross income.

    New law. The 2012 Taxpayer Relief Act extends this exclusion for one year so that it applies to home mortgage debt discharged before 2014.

    Increase in Excludible Employer-Provided Mass Transit and Parking Benefits Reinstated and Extended

    For 2011, an employee could exclude from gross income up to $230 per month in employer-provided mass transit and parking benefits. However, for 2012, the exclusion rose to $240 for parking due to an inflation adjustment, but it fell to $125 for employer-provided transit and vanpooling benefit, creating a disparity with other qualified transportation fringe benefits. Under pre-Act law, this disparity was scheduled to continue for post-2012 years, and mass transit and vanpool benefits extended to employees would only be excludable up to $125 per month.

    New law. The 2012 Taxpayer Relief Act retroactively extends this increase in the monthly exclusion for employer-provided transit and vanpool benefits, so that the exclusion for employer-provided transit and vanpool benefits is equal to that of the exclusion for employer-provided parking benefits, through 2013.

    As a result of indexing changes, the exclusion is $245 per month in 2013.

    It’s unclear how a taxpayer could actually take advantage of these retroactively increased benefits for 2012. Presumably, this issue will be addressed in future IRS guidance.

    Treatment of Mortgage Insurance Premiums as Deductible Qualified Residence Interest Reinstated and Extended

    Mortgage insurance premiums paid or accrued by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer’s qualified residence are treated as deductible qualified residence interest, subject to a phase-out based on the taxpayer’s AGI.

    New law. The 2012 Taxpayer Relief Act retroactively extends this provision for two years so that a taxpayer can deduct, as qualified residence interest, mortgage insurance premiums paid or accrued before Jan. 1, 2014.

    State and Local Sales Tax Deduction Reinstated and Extended

    Taxpayers who itemize deductions may elect to deduct state and local general sales and use taxes instead of state and local income taxes.

    New law. The 2012 Taxpayer Relief Act retroactively extends this provision for two years so that itemizers can elect to deduct state and local sales and use taxes instead of state and local income taxes for tax years beginning before Jan. 1, 2014.

    Liberalized Rules for Qualified Conservation Contributions Reinstated and Extended

    A taxpayer’s aggregate qualified conservation contributions (i.e., contributions of appreciated real property for conservation purposes) are allowed up to the excess of 50% of the taxpayer’s contribution base over the amount of all other allowable charitable contributions (100% for qualified farmers and ranchers), with a 15-year carryover of such contributions in excess of the applicable limitation.

    New law. The 2012 Taxpayer Relief Act retroactively extends for two years the 50% and 100% limitations on qualified conservation contributions of appreciated real property so that they apply to contributions made in tax years beginning before Jan. 1, 2014.

    Above-the-Line Deduction for Higher Education Expenses Reinstated and Extended

    A taxpayer may claim an above-the-line deduction for qualified tuition and related expenses for higher education paid by that taxpayer during the tax year, subject to applicable adjusted gross income (AGI) and dollar limits.

    New law. The 2012 Taxpayer Relief Act retroactively extends the qualified tuition deduction for two years so that it can be claimed for tax years beginning before Jan. 1, 2014.

    Nontaxable IRA Transfers to Eligible Charities Reinstated and Extended

    Taxpayers who are age 70 1/2 or older can make tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000 per year. These distributions aren’t subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a deduction on the taxpayer’s return.

    New law. The 2012 Taxpayer Relief Act retroactively extends this provision for two years so that it’s available for charitable IRA transfers made in tax years beginning before Jan. 1, 2014. The Act includes two elections to deal with the retroactive reinstatement of this provision:

    (1) A taxpayer may elect to have a distribution made in January of 2013 be treated as if it were made on Dec. 31, 2012.

    (2) A taxpayer may elect to treat any portion of a distribution from an IRA to the taxpayer during December of 2012 as a qualified charitable distribution, provided that (i) the portion is transferred in cash after the distribution to an eligible charitable organization before Feb. 1, 2013, and (ii) except for the fact that the distribution wasn’t originally transferred directly to the organization, the distribution otherwise meets Code Sec. 408(d)(8)’s requirements.

    False Prisoner Tax Return Disclosure Rules Modified and Made Permanent

    IRS is allowed to disclose to the head of the Federal Bureau of Prisons (Bureau) and the head of any state agency charged with the responsibility for prison administration (agency), return information for individuals incarcerated in federal prison or state prison whom IRS has determined may have filed or facilitated the filing of a false return. The disclosure is permitted to the extent that IRS determines that it is necessary to permit effective federal tax administration.

    New law. The 2012 Taxpayer Relief Act expands the persons to whom false prisoner returns and return information can be disclosed to include officers and employees of the Bureau or agency, contractors responsible for operating a Federal or state prison on behalf of the Bureau or agency, and legal representatives of the Bureau, agency, responsible contractor, or prisoner. It also expands the authorized uses of the disclosed information to include administrative and judicial proceedings arising from various administrative actions. These provisions are made permanent by the 2012 Taxpayer Relief Act.

    Transfer of Amounts in Applicable Retirement Plans to Designated Roth Accounts

    New law. For transfers after Dec. 31, 2012, in tax years ending after that date, plan provisions in an applicable retirement plan (which includes a qualified Roth contribution program) can allow participants to elect to transfer amounts to designated Roth accounts with the transfer being treated as a taxable qualified rollover contribution under Code Sec. 408A(e). Such a transfer will not be treated as violating Code Sec. 401(k)(2)(B)(i), Code Sec. 403(b)(7)(A)(i), Code Sec. 403(b)(11), or Code Sec. 457(d)(1)(A) .

    Recovery Act Extenders

    The 2012 Taxpayer Relief Act extends for five years the following items that were originally enacted as part of the American Recovery and Investment Tax Act of 2009 and that were slated to expired at the end of 2012:

    … the American Opportunity tax credit, which permits eligible taxpayers to claim a credit equal to 100% of the first $2,000 of qualified tuition and related expenses, and 25% of the next $2,000 of qualified tuition and related expenses (for a maximum tax credit of $2,500 for the first four years of post-secondary education);

    … eased rules for qualifying for the refundable child credit; and

    … various earned income tax credit (EITC) changes relating to higher EITC amounts for eligible taxpayers with three or more children, and increases in threshold phaseout amounts for singles, surviving spouses, and heads of households.

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