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Tax Law Changes for 2012, and 2013

It has been a very busy month for the Internal Revenue Service. Members of Congress finally nailed down some tax legislation for 2012, and 2013.  However, their last minute decisions put the IRS behind when it comes to processing tax returns because the agency has to work to update its software to adjust for the new laws.

Here are some of the new tax changes for 2013:

One change for all working Americans is a net pay decrease of two percent. The payroll tax holiday, which lasted two years, was allowed to expire. This means the full 6.2 percent of Social Security is now being withheld from workers’ pay.  In addition, the wage ceiling on which Social Security is taxed has been increased to $113,700. Medicare tax is unlimited, but workers earning more than $200,000 (or couples earning more than $250,000) will have an additional 0.9 percent withheld.

People in high-income households making more than $400,000 (single) or $450,000 (married filing jointly) will see their tax bracket increase from 35 to 39.6 percent. This will not affect 2012 tax returns. Workers in the new high tax bracket will also be subject to a capital gains rate of 20 percent as well as a 3.8 percent surcharge tax on investment income for the Affordable Care Act.

The Pease (named after the Congressman who introduced the legislation) created a limit on itemized deductions; also a phase-out of personal deductions was reinstated.  The thresholds are $300,000 for married filing joint, $275,000 for head of household, and $250,000 for single. Workers earning these higher income amounts will not be allowed to take all of their itemized deductions. Their personal exemptions – another subtraction from their income before taxes are calculated – will be phased-out.

Congress permanently patched the Alternative Minimum Tax (AMT) and adjusted it for inflation. The AMT patch expired at the end of 2011; this legislation keeps taxes lower for some 60 million Americans for 2012 and beyond. The IRS introduced the AMT back in 1969 to ensure that high-income individuals, corporations, trusts and estates paid at least some minimum amount of tax, regardless of deductions, credits or exemptions. While it was once only important for a limited number of high-income individuals who make extensive use of tax shelters and deductions, more and more people have been affected by it.

The following tax benefits were extended by Congress:

  • Discharge of qualified principal residence exclusion. Filers going through a foreclosure or short sale who may have had loan forgiveness should look into this as it will exclude most, if not all, of the forgiven-amount from taxable income.
  • Educators may continue to deduct $250 in related job expenses as an adjustment to income.
  • Mortgage insurance premiums may be deducted as mortgage interest.
  • The deduction for state and local sales taxes may still be taken instead of income taxes.
  • The $1,000 Child Tax Credit, the enhanced Earned Income Tax Credit, and the enhanced American Opportunity Tax Credit have all been extended through 2017.
  • Tuition costs may be deducted as an adjustment to income.
  • IRA-to-charity exclusion from taxable income for required minimum distributions (RMD) up to $100,000 remains including a special provisions that allows distributions taken in December 2012 to be contributed to qualified charitable organizations before February 1, 2013 and transfers made in January 2013 to be treated as made in 2012.

 

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