American Taxpayer Relief Act of 2012

  • On January 1, 2013 by a vote of 89 to 8, (HR 8) was approved by the Senate
  • On January 3, 2013 by a vote of 257 to 167 was approved by Congress.

ATRA 2012: (modification of §1)

  • allows the 2001 and 2003 tax rates to sunset after 2012 for individuals with incomes over $400,000 and families with incomes over $450,000;
  • permanently “patches” the alternative minimum tax (AMT); and
  • provides for a maximum estate tax of 40 percent with a $5 million exclusion.
  • makes permanent income tax rates for all, except for taxpayers with taxable income above $400,000 ($450,000 for married taxpayers, $425,000 for heads of households).  Income above these levels will be taxed at a 39.6 percent rate.
  • Individual marginal tax rates of 10, 15, 25, 28, 33, and 35 are permanent, but with an additional 39.6 percent rate carved out from the old 35 percent bracket range.
  • The new law directs that the $450,000/$400,000 beginning of the 39.6 percent bracket be adjusted for inflation after 2013 based upon the standard formula of Code Sec. 1(f).
  • Trusts and estates.  That top rate increases to 39.6 percent and applies to the entire 35-percent bracket range end and, is projected to begin in 2013 in excess of $11,950.
  • ATRA 2012 extends all existing marriage penalty relief.

Capital Gains/Dividends Rates (modification of §1)

  • The top rate for capital gains and dividends raises to  20% and will apply to the extent that a taxpayer’s income exceeds the thresholds set for the 39.6 % rate.
  • All other taxpayers will continue capital gains and dividends tax at a maximum rate of 15 percent.  A zero percent rate will also apply to capital gains and dividends to the extent income falls below the top of the 15 percent bracket $72,500.
  • The 28% and 25% tax rates for collectibles and un-recaptured Code Sec. 1250 gain, continue unchanged.

AMT – Alternative Minimum Tax (modification of §55(d))

  • ATRA 2012 permanently “patches” the AMT by increasing the exemption amounts and provides for an annual inflation adjustment.
  • The 2012 AMT exemption amounts are increase to:
    • $50,600 for unmarried individuals;
    • $78,750 for married taxpayers filing jointly.

ATRA 2012 revives modified “Pease” limitations on itemized deductions.  (modification of §68)

  • However, higher “applicable threshold” levels apply under the new law:
    • $300,000 for married couples and surviving spouses.
    • $275,000 for heads of household
    • $250,000 for unmarried taxpayers; and
    • $150,000 for married taxpayers filing separately.

ATRA 2012 also reinstates the personal exemption phase (PEP) out rules. (modification of §151)

  • $300,000 for married couples and surviving spouses
  • $275,000 for heads of household
  • $250,000 for unmarried taxpayers; and
  • $150,000 for married taxpayers filing separately

The total amount of exemptions that may be claimed by the taxpayer is reduced by two percent (2%) for each $2,500, or portion thereof by which the taxpayer’s adjusted gross income exceeds the applicable threshold.

Estate Tax Portability 

  • ATRA 2012 makes permanent “portability” between spouses.
  • Portability allows the estate of a decedent who survived by a spouse to make a portability election to permit the surviving spouse to apply the decedent’s unused exclusion (DSUE) to the surviving spouse’s own transfers during life and at death.

Gift Tax

  • ATRA 2012 provides a 40 percent tax rate and a unified estate and gift tax exemption of $5 million (inflation adjusted).

Retirement Savings (modification of §401)

  • ATRA 2012 lifts most restrictions, and now allows participants in 401(k) plans with in-plan Roth conversion features to make transfers to a Roth account at anytime

Child Tax Credit (modification of §24(b))

  • ATRA 2012 extends permanently the $1,000 child tax credit.
  • The provision that reduces the earnings threshold for the refundable portion of the child tax credit to $3,000 is extended through 2017.

State and Local Sales Tax Deduction  (modification of §164(b)(50))

  • ATRA 2012 extends through 2013 the election to claim an itemized deduction for state and local general sales taxes in lieu of state and local income taxes.

Earned Income Credit (modification of §32(b)(3))

ATRA makes permanent or extends through 2017 enhancements to the EIC :

  • including a simplified definition of earned income,
  • reform of the relationship test and
  • modification of the tie-breaking rule.

Other Child-Related Tax Relief (modification of §23(b)& (c))

  • The ATRA extends permanently enhancements to the adoption credit and the income exclusion for employer-paid or reimbursed adoption expenses up to $10,000.

Child and Dependent Care Credit (modification of §21)

  • ATRA extends permanently enhancements to the child and dependent care credit.  The current 35 percent credit rate is made permanent along with the $3,000 cap on expenses for one qualifying individual and the $6,000 cap on expenses for two or more qualifying individuals.
  • The credit is reduced by one percentage point for each $2,000 of AGI, or fraction thereof, above $15,000 through $43,000.  Taxpayers with AGI over $43,000 are allowed a credit equal to 20 percent.

Employer-Provided Child Care Credit (modification of §129)

  • ATRA 2012 extends permanently the credit for employer-provided child care facilities and services.

American Opportunity Tax Credit (modification of §25A)

  • ATRA 2012 extends through 2017 the American Opportunity Tax Credit (AOTC).
  • The AOTC tax credit of 100 percent of the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000, for a total maximum credit of $2,500.

Deduction For Qualified Tuition And Related Expenses (modification of §222) “above the line”

  • ATRA 2012 extends until December 31, 2013 the above–the-line deduction for qualified tuition and related expenses.
  • The bill also extends the deduction retroactively for the 2012 tax year.

Student Loan Interest Deduction (modification of §221)

  • ATRA permanently suspends the 60-month rule for the $2,500 above-the-line student loan interest deduction.  The Act also expands the modified adjustment gross income range for phase-out deduction.

Coverdell Education Savings Account (modification of §530)

  • ATRA 2012 permanent enhancements include a $2,000 maximum contribution amount and treatment of elementary and secondary school expenses as well as post-secondary expenses as qualified expenditures.

Employer-Provided Education Assistance (modification of §127)

  • ATRA 2012 extends permanently the exclusion of employer-provided education assistance up to $5,250.

Teachers’ Classroom Expense Deduction (modification of §62)

  • ATRA 2012 extends through 2013 the teacher’s classroom expense deduction.  The deduction, allows qualified expenses up to $250 paid out-of-pocket during the year

Exclusion Of Cancellation Of Indebtedness On Principal Residence (modification of §108(c))

  • Cancellation of indebtedness income in this provision excludes from income cancellation of mortgage debt on a principal residence of up $2 million through 2013.

Mortgage Insurance Premiums (modification of §163)

  • The provision treats mortgage insurance premiums as deductible interest that extends this provision through December 31, 2013.

IRA Distributions to Charity  (modification of §408(a))

  • ATRA 2012 extends for two years, through December 31, 2013, the provision allowing tax-free distributions from individual retirement accounts to public charities, by individuals age 70 ½  or older, up to a maximum of $100,000 per taxpayer each year.
  • The Ac ATRA 2012 provides special transition rules.  One rule allows taxpayers to recharacterize distribution made in January 2013 as made on December 31, 2012.  The other rule permits taxpayers to treat a distribution from the IRA to the taxpayer made in December 2012 as a charitable distribution, if transferred to charity before February 1, 2013.

Energy Credits For Individuals  (Modification of (§25C))

  • The credit is available to individuals who make energy efficiency improvements to their existing residence.
  • The lifetime credit limit is $500 ($200 for windows and skylights) under the 2010 Tax Relief Act.
  • ATRA 2012 extends the credit at the $500 level through December 31, 2013.

Business Tax Provisions

Code Sec. 179 Depreciation (§179)

  • dollar limit for tax years 2012 and 2013 is $500,000 with a $2 million investment limit.

Bonus Depreciation (§168(k))

  • ATRA 2012 extends 50 percent bonus depreciation through 2013.  Some transportation and longer period production property is eligible for 50 percent bonus depreciation through 2014.

Research Credit (§41)

  • known as the Research & Experimentation Tax Credit or the R&D Tax Credit is a general business tax credit for companies that are incurring R&D expenses in the United States.

New Markets Tax Credit (§45D)

  • The (NMTC) Program was established in 2000 as part of the Community Renewal Tax Relief Act 2000. The goal of the program is to spur revitalization efforts of low-income and impoverished communities across the United States and Territories.
  • The NMTC Program provides tax credit incentives to investors for equity investments in certified Community Development Entities, which invest in low-income communities. The credit equals 39% of the investment paid out (5% in each of the first three years, then 6% in the final four years, for a total of 39%) over seven years (more accurately, six years and one day of the seventh year) . A Community Development Entity must have a primary mission of investing in low-income communities and persons

Employer wage credit for empoyees who are active duty military personnel (H.E.A.R.T. act of 2008)

  • Differential wage payments are those payments provided by an employer to employees on active military duty, to make up some or all of the wages the employee would have received if he or she were working for the employer.
  • An employer may receive a tax credit for differential wage payments made to qualified employees who have been called to active military service. The credit is 20% of the first $20,000 of qualified differential wage payments made to each qualified employee.

Extension of the Work Opportunity Tax Credit WOTC (§190)

  • known as the Research & Experimentation Tax Credit or the R&D Tax Credit is a general business tax credit for companies that are incurring R&D expenses in the United States.

15 Year Straight Line Cost Recovery for : (§168 (e))

Qualified Leasehold Improvements
Qualified Restaurant Buildings
Qualified Retail Improvements

Enhanced charitable deduction for contributions of food inventory by businesses (§170(e)(3))

  • Exclusion of 100% of gain on certain small business stock (§1202)
  • Basis adjustment to stock of an S Corporation making charitable contributions of property. (§1367)
  • Reduced S-Corp recognition of Built-In-Gain holding period (BIG tax) (§1374)

Who Should File a 2012 Tax Return?

If you received income during 2012, you may need to file a tax return in 2013. The amount of your income, your filing status, your age and the type of income you received will determine whether you’re required to file. Even if you are not required to file a tax return, you may still want to file. You may get a refund if you’ve had too much federal income tax withheld from your pay or qualify for certain tax credits.

You can find income tax filing requirements on IRS.gov. The instructions for Forms 1040, 1040A or 1040EZ also list filing requirements. The Interactive Tax Assistant tool, also available on the IRS website, is another helpful resource. The ITA tool answers many of your tax law questions including whether you need to file a return.

Even if you’ve determined that you don’t need to file a tax return this year, you may still want to file. Here are five reasons why:

1. Federal Income Tax Withheld.  If your employer withheld federal income tax from your pay, if you made estimated tax payments, or if you had a prior year overpayment applied to this year’s tax, you could be due a refund. File a return to claim any excess tax you paid during the year.

2. Earned Income Tax Credit.  If you worked but earned less than $50,270 last year, you may qualify for EITC. EITC is a refundable tax credit; which means if you qualify you could receive EITC as a tax refund. Families with qualifying children may qualify to get up to $5,891 dollars. You can’t get the credit unless you file a return and claim it. Use the EITC Assistant to find out if you qualify.

3. Additional Child Tax Credit.  If you have at least one qualifying child and you don’t get the full amount of the Child Tax Credit, you may qualify for this additional refundable credit. You must file and use new Schedule 8812, Child Tax Credit, to claim the credit.

4. American Opportunity Credit.  If you or someone you support is a student, you might be eligible for this credit. Students in their first four years of postsecondary education may qualify for as much as $2,500 through this partially refundable credit. Even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student. You must file Form 8863, Education Credits, and submit it with your tax return to claim the credit.

5. Health Coverage Tax Credit.  If you’re receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, you may be eligible for a 2012 Health Coverage Tax Credit. Spouses and dependents may also be eligible. If you’re eligible, you can receive a 72.5 percent tax credit on payments you made for qualified health insurance premiums.

Want more information about filing requirements and tax credits? Visit IRS.gov.

Taxable and Nontaxable Income

Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable:

  • Child support payments;
  • Gifts, bequests and inheritances;
  • Welfare benefits;
  • Damage awards for physical injury or sickness;
  • Cash rebates from a dealer or manufacturer for an item you buy; and
  • Reimbursements for qualified adoption expenses.

Some income is not taxable except under certain conditions. Examples include:

  • Life insurance proceeds paid to you because of an insured person’s death are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
  • Income you get from a qualified scholarship is normally not taxable. Amounts you use for certain costs, such as tuition and required course books, are not taxable. However, amounts used for room and board are taxable.

All income, such as wages and tips, is taxable unless the law specifically excludes it. This includes non-cash income from bartering – the exchange of property or services. Both parties must include the fair market value of goods or services received as income on their tax return.

If you received a refund, credit or offset of state or local income taxes in 2012, you may be required to report this amount. If you did not receive a 2012 Form 1099-G, check with the government agency that made the payments to you. That agency may have made the form available only in an electronic format. You will need to get instructions from the agency to retrieve this document. Report any taxable refund you received even if you did not receive Form 1099-G.

For more information and examples, see Publication 525, Taxable and Nontaxable Income. The booklet is available at IRS.gov or by calling 800-TAX-FORM
(800-829-3676).

Ten Tips to Help You Choose a Tax Preparer

Many people look for help from professionals when it’s time to file their tax return. If you use a paid tax preparer to file your federal income tax return this year, the IRS urges you to choose that preparer carefully. Even if someone else prepares your return, you are legally responsible for what is on it.

Here are ten tips to keep in mind when choosing a tax return preparer:

1. Check the preparer’s qualifications.  All paid tax return preparers are required to have a Preparer Tax Identification Number. In addition to making sure they have a PTIN, ask if the preparer belongs to a professional organization and attends continuing education classes.

2. Check on the preparer’s history.  Check with the Better Business Bureau to see if the preparer has a questionable history. Also check for any disciplinary actions and for the status of their licenses. For certified public accountants, check with the state boards of accountancy. For attorneys, check with the state bar associations. For enrolled agents, check with the IRS Office of Enrollment.

3. Ask about service fees.  Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers can. Also, always make sure any refund due is sent to you or deposited into an account in your name. Taxpayers should not deposit their refund into a preparer’s bank account.

4. Ask to e-file your return.  Make sure your preparer offers IRS e-file. Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return. IRS has safely and securely processed more than one billion individual tax returns since the debut of electronic filing in 1990.

5. Make sure the preparer is accessible.  Make sure you will be able to contact the tax preparer after you file your return, even after the April 15 due date. This may be helpful in the event questions arise about your tax return.

6. Provide records and receipts.  Reputable preparers will request to see your records and receipts. They will ask you questions to determine your total income and your qualifications for deductions, credits and other items. Do not use a preparer who is willing to e-file your return by using your last pay stub before you receive your Form W-2. This is against IRS e-file rules.

7. Never sign a blank return.  Avoid tax preparers that ask you to sign a blank tax form.

8. Review the entire return before signing.  Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.

9. Make sure the preparer signs and includes their PTIN.  A paid preparer must sign the return and include their PTIN as required by law. The preparer must also give you a copy of the return.

10. Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or altered a return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. Download the forms on the IRS.gov website or order them by mail at 800-TAX-FORM (800-829-3676).

Six Important Facts about Dependents and Exemptions

While each individual tax return is unique, there are some tax rules that affect every person who files a federal income tax return. These rules involve dependents and exemptions. The IRS has six important facts about dependents and exemptions that will help you file your 2012 tax return.

1. Exemptions reduce taxable income.  There are two types of exemptions: personal exemptions and exemptions for dependents. You can deduct $3,800 for each exemption you claim on your 2012 tax return.

2. Personal exemptions.  You usually may claim one exemption for yourself on your tax return. You also can claim one for your spouse if you are married and file a joint return. If you and your spouse file separate returns, you may claim the exemption for your spouse only if he or she had no gross income, is not filing a joint return and was not the dependent of another taxpayer.

3. Exemptions for dependents.  Generally, you can claim an exemption for each of your dependents. A dependent is either your qualifying child or qualifying relative. If you are married, you may not claim your spouse as your dependent. You must list the Social Security Number of each dependent you claim on your return. See Publication 501, Exemptions, Standard Deduction, and Filing Information, for information about dependents who do not have Social Security numbers.

4. Some people do not qualify as dependents.  While there are some exceptions, you generally may not claim a married person as a dependent if they file a joint return with their spouse.

5. Dependents may have to file.  If you can claim someone else as your dependent on your tax return, that person may still be required to file his or her own tax return. Whether they must file a return depends on several factors, including the amount of their gross income (both earned and unearned income), their marital status and any special taxes they owe.

6. Dependents can’t claim a personal exemption.  If you can claim another person as a dependent on your tax return, that person may not claim a personal exemption on his or her own tax return. This is true even if you do not actually claim that person as your dependent on your tax return. The fact that you could claim that person disqualifies them from claiming a personal exemption.

Remember that a person must meet several tests in order for you to claim them as your dependent. See Publication 501 for the tests you will use to determine if you can claim a person as your dependent.

You can view or download Publication 501 at IRS.gov or order it by calling 800-TAX-FORM (800-829-3676). You can also use the Interactive Tax Assistant at IRS.gov to find out if a person qualifies as your dependent. The ITA is a helpful tool that can answer many of your tax law questions.

Missing Your W-2? Here’s What to Do

It’s a good idea to have all your tax documents together before preparing your 2012 tax return. You will need your W-2, Wage and Tax Statement, which employers should send by the end of January. Give it two weeks to arrive by mail.

If you have not received your W-2, follow these three steps:

1. Contact your employer first.  Ask your employer – or former employer – to send your W-2 if it has not already been sent. Make sure your employer has your correct address.

2. Contact the IRS. After February 14, you may call the IRS at 800-829-1040 if you have not yet received your W-2. Be prepared to provide your name, address, Social Security number and phone number. You should also have the following information when you call:

• Your employer’s name, address and phone number;

• Your employment dates; and

• An estimate of your wages and federal income tax withheld in 2012, based upon your final pay stub or leave-and-earnings statement, if available.

3. File your return on time. You should still file your tax return on or before April 15, 2013, even if you have not yet received your W-2. File Form 4852, Substitute for Form W-2, Wage and Tax Statement, in place of the W-2. Use the form to estimate your income and withholding taxes as accurately as possible. The IRS may delay processing your return while it verifies your information.

If you need more time to file you can get a six-month extension of time. File Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return.  If you are requesting an extension, you must file this form on or before April 15, 2013.

If you receive the missing W-2 after filing your tax return and the information on the W-2 is different from what you reported using Form 4852, then you must correct your tax return. File Form 1040X, Amended U.S. Individual Income Tax Return to amend your tax return.

Forms and instructions are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Eight Tax Benefits for Parents

Your children may help you qualify for valuable tax benefits, such as certain credits and deductions. If you are a parent, here are eight benefits you shouldn’t miss when filing taxes this year.

1. Dependents. In most cases, you can claim a child as a dependent even if your child was born anytime in 2012.   For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.

2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your children that were under age 17 at the end of 2012. If you do not benefit from the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more information, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.

3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for your child or children under age 13, so that you could work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.

4. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. If you have qualifying children, you may get up to $5,891 dollars extra back when you file a return and claim it. Use the EITC Assistant to find out if you qualify. See Publication 596, Earned Income Tax Credit.

5. Adoption Credit. You may be able to take a tax credit for certain expenses you incurred to adopt a child. For details about this credit, see the instructions for IRS Form 8839, Qualified Adoption Expenses.

6. Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. Both credits may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See IRS Publication 970, Tax Benefits for Education.

7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970, Tax Benefits for Education.

8. Self-employed health insurance deduction – If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child. It applies to children under age 27 at the end of the year, even if not your dependent. See IRS.gov/aca for information on the Affordable Care Act.

Forms and publications on these topics are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676

Determining Your Correct Filing Status

It’s important to use the correct filing status when filing your income tax return. It can impact the tax benefits you receive, the amount of your standard deduction and the amount of taxes you pay. It may even impact whether you must file a federal income tax return.

Are you single, married or the head of your household? There are five filing statuses on a federal tax return. The most common are “Single,” “Married Filing Jointly” and “Head of Household.” The Head of Household status may be the one most often claimed in error.

The IRS offers these seven facts to help you choose the best filing status for you.

1. Marital Status.  Your marital status on the last day of the year is your marital status for the entire year.

2. If You Have a Choice.  If more than one filing status fits you, choose the one that allows you to pay the lowest taxes.

3. Single Filing Status.  Single filing status generally applies if you are not married, divorced or legally separated according to state law.

4. Married Filing Jointly.  A married couple may file a return together using the Married Filing Jointly status. If your spouse died during 2012, you usually may still file a joint return for that year.

5. Married Filing Separately.  If a married couple decides to file their returns separately, each person’s filing status would generally be Married Filing Separately.

6. Head of Household.  The Head of Household status generally applies if you are not married and have paid more than half the cost of maintaining a home for yourself and a qualifying person.

7. Qualifying Widow(er) with Dependent Child.  This status may apply if your spouse died during 2010 or 2011, you have a dependent child and you meet certain other conditions.

IRS e-file is the easiest way to file and will help you determine the correct filing status. If you file a paper return, the Interactive Tax Assistant at IRS.gov is a tool that will help you choose your filing status.

You can also find more helpful information in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. This publication is available at IRS.gov or by calling 1-800-TAX-FORM (800-829-3676).