THE TAXPAYER RELIEF ACT OF 2012
NEW TAXES IN 2013
Andy Starnes & Bert Mills
Moore Colson
e n e r g y . i n s i g h t . g r o w t h .
What was the fiscal cliff?
• Budget Control Act of 2011: Deal reached between Congress & the
Administration in summer 2011 to raise the federal debt ceiling to
$16.4 Trillion.
• As part of the deal, a deficit reduction super-committee was created
and given until November 2011 to either (1) reach a deficit reduction
agreement, or else (2) $1.2 Trillion of broad based spending cuts
(“sequestration”) would automatically be triggered over a multi-year
period beginning in 2013.
e n e r g y . i n s i g h t . g r o w t h .
What was the fiscal cliff?
• The super-committee failed to reach an agreement, setting-up the socalled “fiscal cliff” scenario:
• Sequestration was set to begin 1/1/2013 (spending cuts)
• $16 trillion debt ceiling reached around 12/31/2012; increase
needed to allow federal government to borrow to fund spending
• Bush tax cuts to “sunset” on 12/31/12 (tax increase)
• 2% payroll tax holiday set to expire on 12/31/12 (tax increase).
• Alternative Minimum Tax (AMT) to hit millions more taxpayers
in 2012 (tax increase)
• Several new taxes enacted in connection with the Affordable Care
Act to take effect on 1/1/2013 (tax increase)
e n e r g y . i n s i g h t . g r o w t h .
“Fiscal Cliff” Tax Changes….what
might have been
• An income tax increase for all individual taxpayers as income tax rates
revert back to 2001/2003 levels (top marginal rate moves to 39.6%)
• Long term capital gain rate reverts to 20% from 15%
• Expiration of 15% rate for qualified dividends (tax rate on dividends moves
to 39.6%, a 264% increase in taxes on dividend income)
• Itemized Deduction/Personal Exemption phase-outs would have resumed
• AMT individual exemption amounts significantly decreased
e n e r g y . i n s i g h t . g r o w t h .
“Fiscal Cliff” Tax Changes….what
might have been (cont.)
• Standard deduction for joint returns would have decreased $1,950
• No deduction for student loan interest after 1st 60 mos. of repayment
• Earned income tax credit, child tax credit &American Opportunity (Hope)
tax credit all revert to old, lower limits & less generous rules
• Expiration of temporary 2% reduction in employee portion of payroll tax
• Estate & gift tax provisions would revert to 2001 rules (exclusion decrease
from 5.12M to $1M & tax rate increase from 35% to 55%)
e n e r g y . i n s i g h t . g r o w t h .
“Fiscal Cliff” Avoided?
• On January 2, 2013, the American Taxpayer
Relief Act of 2012 (ATRA) was enacted.
• Provided short-term tax policy answers by
making permanent certain tax provisions….but
stay tuned
• Pushed decisions regarding spending cuts
(sequestration) and debt-ceiling increases until
March 1, 2013
e n e r g y . i n s i g h t . g r o w t h .
ATRA……what didn’t happen?
• No income tax rate increase for individual taxpayers with
taxable income less than $400K single/$450K joint
• No taxation of qualified dividends at ordinary income tax
rates
• No decrease in AMT exemption
• No reduction in standard deduction for joint returns
e n e r g y . i n s i g h t . g r o w t h .
ATRA……what didn’t happen
(cont.)?
• No elimination of deductibility of student loan interest after
1st 60 mos. of repayment
• No reduction in tax credits for earned income tax credit, child
tax credit &American Opportunity (Hope) tax credit
• No decrease in estate & gift tax exemption amounts
e n e r g y . i n s i g h t . g r o w t h .
ATRA – Summary of Major Tax
Provisions Enacted
• Individual tax rates made permanent and indexed for inflation.
• Long term capital gain/qualified dividend tax rates made
permanent:
• AMT patch & nonrefundable credit offset - permanent effective
1/1/2012
• Personal exemption and itemized deduction phase-outs resume
• Estate tax exemptions & rates made permanent:
• Increased accelerated depreciation extended (through 2013)
• Research credit & Work Opportunity Tax Credit (WOTC)
extended (through 2013)
e n e r g y . i n s i g h t . g r o w t h .
ATRA - Permanent tax rate changes
enacted for individuals effective
1/1/2013
• Taxable income above high-earner $400K single/$450K joint
thresholds subject to 39.6% rate (on ordinary income) and 20%
preferential rate (on LTCG & qualified dividends).
• Permanent extension of 2012 ordinary income tax rates and 0%/15%
preferential tax rates on LTCG & qualified dividend income for:
•
•
•
•
Single taxpayers less than $400,000 per year
Heads of households less than $425,000 per year
Married couples filing joint returns less than $450,000 per year
Married couples filing separately less than $225,000 per year
• Permanent extension of marriage penalty relief: alignment of joint
rates with corresponding top-of-bracket amounts for single taxpayer.
e n e r g y . i n s i g h t . g r o w t h .
ATRA - Other permanent tax changes for
individuals effective 1/1/2013
• Standard deduction marriage penalty relief is made permanent.
• Permanent reduction of rates & withholding for “kiddie tax”
• Election to include qualified dividends in investment income for
purposes of investment interest deduction now permanently
allowed.
• “In-plan Roth rollovers” now permitted for designated Roth
accounts after 12/31/12.
• Tax rate on individuals’ non-qualifying capital gain withdrawals
from Merchant Marine CCFs now 20%
e n e r g y . i n s i g h t . g r o w t h .
ATRA - Other permanent tax changes for
individuals effective 1/1/2013 (cont.)
• Inclusion of qual. dividend in prohibition on IRD double benefit –
permanent
• Qual. dividend treatment for ordinary income on disposition of Sec.
306 stock now permanent.
• Child tax credit of $1,000 per child permanently extended; increase in
refundable portion extended through 2017.
• EIC simplification made permanent; increased phase-out threshold
increase for joint filers & increased EIC for families with 3 or more
qualifying children both extended through 2017.
• EGTRRA expansion of dependent care credit made permanent.
• Expanded adoption credit rules (but not refundable) made permanent.
e n e r g y . i n s i g h t . g r o w t h .
ATRA - Permanent AMT relief enacted
for individuals effective 1/1/2012
• Previous AMT patch expired on 12/31/2011.
• AMT exemption amount retroactively increased for 2012 (to be
adjusted for inflation in subsequent years) as follows:
• $50,600 for unmarried individuals
• $79,750 for married taxpayers filing jointly & surviving spouses
• $39,375 for married taxpayers filing separately
• Certain nonrefundable personal credits allowed to offset both
regular tax & AMT.
e n e r g y . i n s i g h t . g r o w t h .
ATRA - Permanent changes to thresholds
for phase-outs of itemized deductions &
personal exemptions effective 1/1/13
• In previous years, phase-out of itemized deductions & personal
exemptions (to the extent that Adjusted Gross Income exceeded
certain threshold amounts) was temporarily suspended.
• Effective 1/1/2013, phase-outs have been reinstated, but…
• Threshold amounts permanently increased (and subject to
adjustment for inflation in subsequent years).
• New thresholds (for both itemized deductions & personal
exemptions) are:
•
•
•
•
$300,000 for married taxpayers filing jointly & surviving spouses
$275,000 for heads of households
$250,000 for unmarried taxpayers
$150,000 for married taxpayers filing separately
e n e r g y . i n s i g h t . g r o w t h .
ATRA – Phase-outs of itemized
deductions effective 1/1/2013
• Itemized deduction phase-out is 3% of the excess of taxpayer’s
AGI over threshold amount, up to a maximum of 80% of
itemized deductions.
• For taxpayers in top tax bracket, phase-out of itemized
deductions equates to 1.2% tax increase.
e n e r g y . i n s i g h t . g r o w t h .
ATRA – Phase-outs of itemized
deductions effective 1/1/2013 (cont.)
• Example: For a married couple filing a joint return with AGI of
$500,000 in 2013 (AGI exceeds $300,000 by $200,000) and
itemized deductions of $100,000 prior to phase-out:
$200,000 excess of AGI over threshold * 3% = $6,000
$100,000 of itemized deductions before phase-out
Less $6,000 phase-out
Equals: $94,000 net deductible itemized deductions after phase-out
e n e r g y . i n s i g h t . g r o w t h .
ATRA - Personal Exemption Phaseout (PEP) effective 1/1/2013
• PEP is 2% of the personal exemption that would be allowed
(without PEP) for each $2,500 or portion thereof by which
taxpayer’s AGI exceeds applicable threshold amount.
• For taxpayers whose AGI exceeds threshold amount by
$125,000 or more, their personal exemptions are effectively
100% phased out.
e n e r g y . i n s i g h t . g r o w t h .
ATRA - Personal Exemption Phaseout (PEP) effective 1/1/2013 (cont.)
• Example for a married couple with 2 dependent kids, filing a
joint return with AGI of $400,000 in 2013 (AGI exceeds
$300,000 by $100,000) and 4 personal exemptions of $3,800
each ($15,200 total) prior to phase-out:
$100,000 excess of AGI over threshold
Divided by $2,500 = 40…. 40 * 2% = 80% PEP
$15,200 total * 80% = $12,480 PEP
$2,720 net deductible personal exemptions after PEP
e n e r g y . i n s i g h t . g r o w t h .
ATRA - Individual Tax Extenders
• Exclusion of cancellation of indebtedness on principal residence
has been extended for one year (through 2013)
Provisions expiring 12/31/11 retroactively extended for 2012 & 2013:
• 100% gain exclusion for qualified small business stock.
• Parity for employer-provided mass transit & parking benefits.
• State & local sales tax deduction.
• Interest deduction for mortgage insurance premiums.
• Special rule allowing contributions of capital gain real property
for conservation purposes to be taken against 50% of
contribution.
• Special rule allowing tax-free distributions from IRAs to public
charities, by individuals age 70½ or older.
e n e r g y . i n s i g h t . g r o w t h .
ATRA -Tax changes specifically relating
to education effective 1/1/2013
Permanent tax changes enacted:
• 2001 EGTRRA changes to student loan deduction rules made
permanent.
• Increased $2,000 contribution limit & other EGTRRA
enhancements to Coverdell ESAs made permanent.
• Exclusion for employer-provided educational assistance &
restoration of the exclusion for graduate-level courses made
permanent.
• Income exclusion for awards under the National Health Service
Corps & Armed Forces Health Professions programs made
permanent.
e n e r g y . i n s i g h t . g r o w t h .
ATRA -Tax changes specifically relating
to education effective 1/1/2013 (cont.)
Temporary extensions enacted:
• AOTC for higher education expenses extended 5 years through
2017.
• Qualified tuition deduction retroactively extended through 2012
& 2013.
• Teachers’ classroom expense deduction for qualified out-ofpocket expenses up to $250 retroactively extended for 2012 &
2013.
e n e r g y . i n s i g h t . g r o w t h .
New Tax Levies Imposed by the
2010 Affordable Care Act
• Applicable threshold amounts:
• $200,000 for unmarried taxpayers
• $250,000 for married taxpayers filing joint returns
• $125,000 for married taxpayers filing separate returns
• New healthcare tax of 3.8% on investment income (if MAGI
exceeds the applicable threshold amount)
• New hospital insurance tax of 0.9% on earned income in excess
of applicable threshold amount
• New floor for deductibility of medical expenses is 10% of AGI
(rather than 7.5% of AGI)
e n e r g y . i n s i g h t . g r o w t h .
ATRA - Permanent tax changes enacted
for estates & trusts effective 1/1/2013
• Permanent extension of 2012 ordinary income tax rates for estates
and trusts with taxable income of $11,950 or less (indexed for
inflation in future years)
• Estate tax, gift tax & GST exemption amount permanently increased
to $5.25 Million effective 1/1/2013 (indexed for inflation after 2011)
• 35% tax rate permanently extended for taxable estates/gifts up to
$500,000
• Progressive rate structure for taxable amounts over $500,000:
• 37% for amounts over $500,000 but not over $750,000
• 39% for amounts over $750,000 but not over $1,000,000
• 40% for amounts over $1,000,000
• Portability rules permanently extended.
e n e r g y . i n s i g h t . g r o w t h .
ATRA - Business Tax Extenders
• Increased $500,000 Section 179 deduction limit & $2,000,000
phase-out threshold retroactively extended for 2012 & 2013.
• 50% bonus depreciation deduction for qualified property
extended for 1 year through 2013.
• Increase in 1st year depreciation cap for cars that are “qualified
property” extended for 1 year through 2013.
• Sec. 179 election revocation w/o IRS consent & eligibility of
software for Sec. 179 extended 1 year through 2013.
e n e r g y . i n s i g h t . g r o w t h .
ATRA - Business Tax Extenders
(cont).
• 15-year MACRS depreciation for certain building improvements
& restaurants retroactively extended for 2012 & 2013.
• Accumulated earnings & personal holding company tax rates
now 20%
• Research tax credit for taxpayers engaged in qualified activities
retroactively extended for 2012 & 2013.
• WOTC for taxpayers that hire individuals from targeted groups
retroactively extended for 2012 & 2013.
e n e r g y . i n s i g h t . g r o w t h .
ATRA - More Business Tax Extenders
Provisions that expired 12/31/11 retroactively extended for 2012 & 2013:
• 7 year recovery period for motorsports entertainment complexes
• Special expensing rules for qualified film and television productions
• Accelerated depreciation for business property on Indian reservations
• Reduced 5-year recognition period for S Corporation built-in gains
• Rule that S corporation’s charitable contribution of property reduces shareholder’s
basis only by contributed property’s basis
• Election to expense mine safety equipment
• Allowance of Section 199 deduction for Puerto Rico activities
•
•
•
•
•
•
•
Above-basis deduction for charitable contributions of food inventory
Subpart F exclusions for active financing income
Look through rule for payments between related CFCs
Treatment of dividends of Regulated Investment Companies (RICs)
Qualified Zone Academy Bond (QZAB) program
New York Liberty Zone tax-exempt bond financing
Round I empowerment zone designation period
e n e r g y . i n s i g h t . g r o w t h .
ATRA - More Business Tax Extenders
• Employer-provided child care credit (expired 12/31/12) extended
permanently
• New Markets Tax Credit (expired 12/31/11) retroactively extended through 2013
• Temporary 9% minimum low-income housing credit rate for non-federally
subsidized buildings (housing credit $ amount allocations made before 2014)
• Extension of military housing allowance exclusion for tax-exempt bond
financing & for low-income housing credit purposes through 2013
• Differential wage payment credit for activated military reservists (expired
12/31/11) retroactively extended through 2013
• Indian employment credit for wages paid to qualified Native Americans (expired
12/31/11) retroactively extended through 2013
• Mine rescue team training credit (expired 12/31/11) retroactively extended
through 2013.
• Railroad track maintenance credit (expired 12/31/11) retroactively extended
through 2013.
e n e r g y . i n s i g h t . g r o w t h .
ATRA - Energy Incentives
• $500 lifetime maximum credit for individuals who make energy
efficient improvements to their homes has been extended through 2013.
• Sec. 45 production tax credit for facilities that produce energy from
wind facilities extended through 2013.
• Other energy tax incentives extended through 2013:
•
•
•
•
•
•
•
•
•
Credits for alternative fuel vehicle property
Credits for cellulosic bio-fuel production
Credits for biodiesel and renewable diesel
Production credits for Indian coal facilities
Credit for energy efficient new homes
Credit for energy-efficient appliances
Allowance for cellulosic bio-fuel plant property
Special rules for sales of electric transmission property
Tax credits and outlay payments for ethanol
e n e r g y . i n s i g h t . g r o w t h .
Example for an American family
• Jim Smith owns a manufacturing company (c-corporation). His salary is
$450,000 per year and he receives dividends based on profits. Dividends
for 2013 were $120,000.
• Jim’s wife Jane is a teacher earning $80K per year
• Jim & Jane also invest in stocks & bonds and receive 50K of qualified
dividends, 30K of long-term capital gains, & 20K of interest income
(100K of investment income)
• Annual AGI is $750,000
• Itemized deductions are $100,000
• They have 2 dependent children
e n e r g y . i n s i g h t . g r o w t h .
The net effect of reintroducing
itemized deduction & personal
exemption phaseouts
• The Smiths will lose $13,500 in deductions – 3% of their
excess AGI over the $300K threshold – equates to a 1.2%
tax increase (39.6%*3%=1.2%)
• Since the Smiths’ AGI is 450K over the $300K threshold
for personal exemption phase-outs, they lose 100% of their
personal exemption deduction.
e n e r g y . i n s i g h t . g r o w t h .
Lost Deductions Due to Phase-outs =
Hidden Tax Increase
2012
AGI
2013
750,000
750,000
AGI threshold for itemized deduction phaseout
Excess AGI > threshold
Phaseout (lesser of 3% excess or 80% total)
N/A
N/A
N/A
300,000
450,000
13,500
AGI threshold for personal exemption phaseout
Excess AGI > threshold
% phaseout (2% for each 2,500 over threshold)
N/A
N/A
N/A
300,000
450,000
100%
e n e r g y . i n s i g h t . g r o w t h .
Example: Smith Family income & payroll
tax increase in 2013
2012
AGI
Less: itemized deductions after phaseout
Less: personal exemption deduction
Taxable income
Taxable income subject to preferential tax rate
Taxable income subject to ordinary tax rate
Tax on preferential income
Ordinary tax
Total income tax (before surtaxes)
FICA tax: (4.2% in 2012 v. 6.2% in 2013)
2013
750,000
-100,000
-15,200
634,800
200,000
434,800
750,000
-86,500
-0
663,500
200,000
463,500
30,000
121,320
151,390
40,000
127,905
167,905
9,984
12,009
e n e r g y . i n s i g h t . g r o w t h .
Example: New taxes that will be levied on
the Smith family in 2013 (in addition to tax
increases attributable to the fiscal cliff)
Combined wages
Less: $250,000 Threshold
Excess wages subject to new 0.9% hospital tax
0.9% hospital tax on excess wages
3.8% surtax on $220K of investment income
0.9% hospital tax on 200K excess combined wages > 250K
Total new taxes imposed by Affordable Care Act in 2013
2012
2013
$530,000
N/A
N/A
N/A
$530,000
-250,000
280,000
2,520
N/A
N/A
N/A
8,360
2,520
* $10,880
e n e r g y . i n s i g h t . g r o w t h .
Comparison: Smith Family Federal
Tax Burden (2012 vs. 2013)
2012
Income tax
FICA tax
Medicare tax (1.45% on all wages)
0.9% hospital tax on excess wages
3.8% surtax on $220K of investment income
Total Smith family federal tax burden
Effective rate on federal taxable income
before phaseout of deductions
2013
$151,390 $167,905
9,984
12,009
6,525
6,525
N/A
2,520
N/A
8,360
$167,899 $197,319
25.83%
30.36%
Change
+$16,515
+2,025
-0+2,520
+8,360
+$29,420
+4.53%
Note: for purposes of comparison, the effective tax rate is determined by dividing
the combined federal tax burden by the family’s 750K AGI reduced by 100K of
pre-phase-out itemized deductions (ignore the personal exemption deduction).
Put another way, $650K is their net take home each year before federal taxes.
e n e r g y . i n s i g h t . g r o w t h .
Planning Opportunities
• Choice of entity (C corp., S corp.,
Partnership, etc.)
• Capital expenditure timing
• Timing of dividends and bonuses
• Succession planning
• Estate and gift comprehensive planning
e n e r g y . i n s i g h t . g r o w t h .
Still to come…….
• Debt Ceiling Debate
• Sequestration
• Tax Reform?
• Entitlement Program Reform?
e n e r g y . i n s i g h t . g r o w t h .
Remember
to Pick up Your Copy of…
Thanks for Your Attendance !
e n e r g y . i n s i g h t . g r o w t h .