2013 SPRING TAX LETTER
On New Year’s Day, 2013, both houses of Congress passed a significant tax bill (American Taxpayer
Relief Act of 2012); and it was signed into law by the President on January 2, 2013. Some of the
provisions of this bill were retroactive to 1/1/12. Here are the major provisions of the new legislation.
PROVISIONS EXPIRED AT END OF 2011 & RETROACTIVELY REINSTATED FOR 2012 & 2013
1. The itemized deduction for sales tax when it is larger than the state and local income taxes paid;
2. The $250 deduction for classroom supplies available to qualified educators;
3. The opportunity for taxpayers age 70 ½ or older to donate a maximum of $100,000 to a
charitable organization from their IRA account…this can be used to satisfy their “required
minimum distribution”;
4. The “before adjusted gross income” deduction for qualified tuition and fees paid to post
secondary educational institutions (maximum of $4,000);
5. The favorable 15 year depreciation for certain property improvements and new construction;
6. The 50% bonus depreciation available for new equipment purchased by a business;
7. The residential energy credit for individuals (life time limit of $500).
PROVISIONS THAT WERE DUE TO EXPIRE AT THE END OF 2012
1. The tax bracket rates (10%, 15%, 25%, 28%, 33%, and 35%) remain unchanged except for some
high income taxpayers. Single taxpayers with taxable income in excess of $400,000, Heads of
Households with taxable income in excess of $425,000, and Married couples filing joint tax
returns with taxable income in excess of $450,000 will be subject to a new 39.6% tax bracket;
2. The capital gains tax rates for individuals are now permanent:
a. 0% if the net long term gain would be subject to the 10% or 15% ordinary income tax rates;
b. 15% if the net long term gain would be subject to the 25%, 28%, 33%, or 35% ordinary
income tax rate;
c. 20% if the net long term capital gain would be subject to the 39.6% ordinary income tax rate.
3. Qualified dividends will continue to be taxed at the capital gains tax rates (above);
4. The expensing election provision for equipment (179 deduction) has been extended at the
current level of $500,000 through 2013. The provision to allow up to $250,000 of the $500,000
deduction for certain leasehold improvements and restaurant construction costs has also been
retained;
5. The child tax credit for dependents under the age of 17 will remain at $1,000 and will retain the
refundable provision;
6. The expanded provisions of the dependent care credit were made permanent;
7. The expanded provisions of the earned income credit were extended through 2017;
8. The “phase out” rules for itemized deductions have returned for married taxpayers filing a joint
tax return with adjusted gross income in excess of $300,000, Heads of household with adjusted
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gross income in excess of $275,000, and single taxpayers with adjusted gross income in excess
of $250,000;
The “phase out” rules for personal exemptions has also returned with the same thresholds as
the “phase out” rules for itemized deductions;
The home mortgage insurance premium deduction has been extended through 2013;
The American Opportunity Tax Credit for the first 4 years of post secondary tuition and fees
(maximum of $2,500 per student per year) has been extended through 2017;
The increased contribution limit ($2,000) to Coverdell Education Savings Accounts has been
made permanent;
The student loan interest deduction is no longer limited to the first 60 months of payments;
The Adoption Credit is now permanent;
The “Plug-In” Vehicle Credit is available through 2013;
The Research & Development Credit was extended through 2013;
The income tax exemption for cancellation of debt income on a personal residence has been
extended through 2013;
The alternative minimum tax (AMT) exemption amount is now officially indexed to inflation.
ESTATES AND TRUSTS
The ordinary income tax rates for trusts and estates are unchanged except that the 35% tax bracket has
been increased to 39.6%.
The capital gains tax rates for trusts and estates have been changed permanently:
1. 0% for net long term capital gains subject to the 15% ordinary income tax rate;
2. 15% for the net long term capital gains subject to the 25%, 28%, and 33% ordinary income tax
rates;
3. 20% for the net long term capital gains subject to the 39.6% ordinary income tax rate.
Qualified dividends received in trusts and estates will continue to be taxed as long term capital gains.
The federal estate and gift tax maximum rate has been increased from 35% to 40%.
The federal estate and gift tax exemption has been increased to $5,250,000 and is indexed to inflation
for future years. The portability feature (surviving spouse is able to add any unused exemption of
deceased spouse to his/her exemption) has also been retained. These provisions are permanent.
PREVIOUS TAX PROVISIONS BEGINNING IN 2013
Additional Medicare Tax on Earned Income – An additional .9% Medicare tax will be imposed on wages
and self-employment income in excess of $200,000 for single taxpayers and $250,000 for married
taxpayers filing a joint tax return. Employers are required to withhold this additional tax when an
individual’s income exceeds $200,000.
Medicare Tax on Unearned Income – a 3.8% Medicare tax will be imposed on the lesser of net
investment income (interest, dividends, royalties, and rents) or modified adjusted gross income in
excess of $200,000 for single taxpayers and $250,000 for married couples filing a joint tax return.
Itemized Deductions for Medical Expenses – The threshold to claim an itemized deduction for medical
expenses will increase from 7.5% to 10%. Therefore, only those medical expenses in excess of 10% of a
taxpayer’s adjusted gross income will be allowed as an itemized deduction. For taxpayers age 65 and
older, this provision is postponed until 2017.
Health Flexible Spending Account Limit – Salary reductions for health flexible spending arrangements
within cafeteria plans will now be limited to $2,500.
2014 HEALTH INSURANCE COVERAGE
Beginning in 2014, individuals will be required to have some sort of health insurance coverage or pay a
penalty. There are some exceptions…but very few.
Large businesses (50 or more Full Time Equivalent employees) will be required to provide health
insurance to employees. A penalty will be imposed if the federal government has to subsidize any of the
insurance premium cost of any of their employees.
REVIEW OF MICHIGAN 2012 INCOME TAX CHANGES
Elimination of additional $1,800 in personal exemptions for Taxpayers age 65 & older…2012 cost of $78
per person.
Elimination of additional $600 in personal exemptions for Taxpayers with dependent children under the
age of 19…2012 cost of $28 per child.
Political contributions $50/$100 are no longer deductible…cost of $2/$4.
All non refundable credits are gone…cost of $300/$600.
Michigan Homestead Property Tax Credit – No credit is available if the taxable value of the homestead is
greater than $135,000 or if the “household resources” (all taxable and non taxable income with a
deduction for insurance premiums paid, but no deductions for business or rental losses) is $50,000 or
more (credit is reduced prorata for household income between $41,000 and $50,000). The credit for
seniors and disabled taxpayers is reduced by 4% for each $1,000 of household resources in excess of
$21,000 (maximum reduction of 40% for household resources of $30,000 or more).
Retirement Income – The taxation of retirement income now depends on the year that you were born
(for married couples the birth date of the oldest spouse is used):
1. For taxpayers born before 1946, no changes were implemented...single taxpayers are allowed to
exclude over $47,000 in 2012 and married couples filing jointly were allowed to exclude over
$94,000. These amounts are indexed to inflation.
2. For taxpayers born from 1946 through 1952, the exemption for pension income will be $20,000
for single taxpayers and $40,000 for a joint return until the taxpayer reaches 67 years of age.
After age 66, the $20,000/$40,000 exemption applies to all income. Regardless of age, the
exemption is eliminated if household income exceeds $75,000 for single taxpayers and $150,000
for a joint return.
3. For taxpayers born after 1952, the exemption for pensions is eliminated until age 67. After age
66, an exemption of $20,000 for single taxpayers and $40,000 for joint tax returns applies to all
income, including social security income. Taxpayers will have the option of exempting all of the
federal taxable social security income instead of the $20,000/$40,000 exemption. If the
$20,000/$40,000 exemption is used, the taxpayer will not be able to use the social security
exemption or the standard personal exemption. The $20,000/$40,000 exemption will be
eliminated if household income exceeds $75,000 for single taxpayers and $150,000 for joint tax
returns.
4. The deduction for dividends, interest, and capital gains is now available for individuals age 67
and older (was age 65). The deduction is limited to about $10,000 for single taxpayers and
$20,000 for joint tax returns and is indexed for inflation.
MICHIGAN CORPORATE INCOME TAX (CIT)
The 6% Michigan Corporate Income Tax replaces the Michigan Business Tax. This tax only affects regular
corporations (S Corporations are exempt) and there is no exemption for agriculture (the Single Business
Tax and Michigan Business Tax had an agriculture exemption).