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We Survived 12/21/12. Can We Survive 01/01/13?
Dec 27, 2012
Okay, so the headline is a tad over-sensationalized, but whether TV, radio, newspaper, magazines, or the internet…everyone keeps talking about the fiscal cliff and its dreaded effects. Before you get too caught up in the gloom and doom of it, just remember that we’ve been there before. Most of the “controversial” items are really just things that will be allowed to revert back to the way they used to be back in the 1990’s (back then, the child tax credit was only $500, teachers had no above the line deduction, capital gains rates were higher, there were no work opportunity credits, employee FICA tax was 7.65%, etc.)
Of course, no one wants to see their taxes increase. But don’t get into panic mode as if we’ve never seen these events take place. We’ve “survived” before, so we can do it again. It’s just that we’ve gotten used to the tax cuts. What you can do is write your senators and representatives and let your opinion be heard. We have the links to the Senate and the House of Representatives in the “helpful links” section of our website for your convenience. Whether conservative or liberal, we can all agree that the managers (politicians) we’ve hired (voted in) to run our country (USA) need to figure out a better way to run it. Here are a few things that are obvious to us regular folks, but somehow, not to some politicians:
1. When there’s no money in the bank, you don’t go on shopping sprees. You pay for your needs and save up for your wants.
2. Running the country is not a war. One side shouldn’t try to destroy the other. Work together. Listen to each other and be civil with one another.
3. Actions (should) have consequences. An elected official who does not have the best interest of the citizens and the country in mind should not be reelected. Why would we keep electing people who only care about themselves and their cronies and not about us and our future?
4. You can’t please everyone. There will always be someone (citizens, groups, regions, etc.) who feels “messed over” or “cheated” and try pressuring you into giving in to their demands. Life is not easy. Learn from your predicament and try to better your situation by relying on your work ethic and principles and never compromise them.
5. Learn when to compromise. There will be times when the answer must be a firm and unwavering, “NO.” However, most of the time, there will be common ground where everyone can be content. Look at all information available, not just the one that supports your views. The more you know, the better the final decisions will be.
But anyway, this isn’t an ethics blog, it’s a tax blog. So, in a nutshell, here are the provisions that have already expired for 2011 and those that will expire at the end of 2012. FYI, this list came from a seminar handout (NATP) and I really like that they’ve provided the appropriate code section for further research. Some items have an ALL CAPS sentence afterward to provide our own content.
EXPIRED 2011
1. Above the line deduction for certain expenses of elementary and secondary school teachers, also referred to as the eligible educator deduction [§62(a)(2)(D)]. TEACHERS CAN STILL CLAIM THESE EXPENSES IF THEY ITEMIZE.
2. Deduction for state and local sales tax as an itemized deduction instead of state and local income tax [§164(b)(5)]. YOU LOSE OUT IF YOU LIVE IN A STATE THAT HAS NO INCOME TAX.
3. The above the line deduction for qualified tuition and related expenses [§222(e)].
4. An itemized deduction for mortgage insurance premiums as qualified residence interest [§163(h)(3)].
5. The exclusion from income for partners or greater than 2% shareholders of the value of employer-provided mass transit passes and parking benefits [§132(f)].
6. The additional $1,000 added to the inflation adjusted adoption credit amount and the adoption credit being refundable [§36C and §137(f)].
7. The credit for research and experimental expenses [§41(h)(1)(B)].
8. The work opportunity credit, except for qualified veterans [§51(¢)(4)].
9. The Indian employment tax credit [§45A(f)].
10. The provision to treat qualified leasehold property, qualified restaurant property and qualified retail improvements as 15-year MACRS property [§168(e)(3)(E)]. BACK TO 39 YEARS.
11. The differential wage payment credit to employers for payments to individuals performing active duty military service [§45P(b)(1)].
12. The exclusion of the gain of the disposition of qualified small business stock is reduced from 100% to the pre-2009 50% level [§1202(a)(4)].
13. The additional first-year depreciation (aka “bonus depreciation”) is reduced from 100% to 50% [§168(k)(5)]. AND TOTALLY EXPIRES AFTER 2012.
14. The dollar limitations for §179 expensing is reduced from the $500,000 and $2,000,000 limits to inflation adjusted amounts of $139,000 and $560,000 [§179(b)(1) and (2)].
15. The full 10-year period for which an S corporation can be subject to built-in gains tax is reinstated [§1374(d)(7)].
16. The enhanced charitable deduction available to a corporation for the donation of computer equipment for educational purposes [§170(e)(6)]; for the donation of food inventory [§170(e)(3)(C)]; or for the donation of book inventory to public schools [§170(e)(3)(D)].
17. The provision for tax-free distributions from an IRA if distributed to a qualified charitable organization [§408(d)(8)].
18. The special rules for contributions of capital gain real property for conservation purposes [§170(b)(1)(E)].
19. A variety of energy related provisions and credits are gone, including alcohol fuels [§40(e)(1)(A)]; electric drive motorcycles, three wheeled and low speed vehicles [§30(f)]; conversion credit for plug-in electric vehicles [§30B(i)(4)]; credit for construction of energy efficient homes [§45L(g)]; and credit for nonbusiness energy property (windows, storm doors, etc.) [§25C(g)]. SOLAR, WIND, GEOTHERMAL HEAT, AND CERTAIN FUEL CELL CREDITS SURVIVED THE CUT.
20. The new markets tax credit [§45D(f)(1)].
21. The AMT patch is no longer available, so the AMT exemption amount is restored to a lower level, and most nonrefundable personal credits are no longer allowed against AMT [§55(d)(1)(B)]. AMT MAY PLAY A SIGNIFICANT PART IN YOUR TAXSES, AS EXCLUSION AMOUNTS ARE VERY LOW BEGINNING WITH 2012--$45K FOR MFJ AND $33,750 FOR SINGLE FILERS.
As if those weren’t bad enough, here are the provisions that are expiring effective 12/31/2012:
EXPIRING AT THE END OF 20 12
1. The payroll tax cut is eliminated so employee FICA limits are restored [§3121(a)]. SO EMPLOYEE FICA PORTION IS BACK TO 7.65% OF THEIR GROSS.
2. Refundability of long-time credit for prior year minimum tax [§53(e)].
3. The work opportunity credit for hiring qualified veterans §51(¢)(4)(B)]
4. No more 50% bonus depreciation [§168(k)(1)].
5. No longer have the opportunity to make the election to accelerate AMT credits in lieu of additional first-year depreciation [§168(k)(4)].
6. Section 179 expensing provisions revert back to old limits, maximum of $25,000, phase out starts at $200,000 [§179(b)(1) and (2)].
7. Various energy provisions [§40(b); §45(d); §45(e); §48(a); §168(1); etc.].
8. Major provisions of the Bush tax cuts.
a. 10% tax bracket expires. RIGHT AWAY, YOU’RE TAXED AT 15%
b. Top four tax brackets increase. TO A MAXIMUM 39.6%
c. Top rate for capital gains increases.
d. The income limitation on the overall amount of itemized deductions is restored.
e. The income phase out of personal exemptions is restored. SO IF YOU MAKE TOO MUCH—NO EXEMTION FOR YOU!
f. The child tax credit reverts to $500 per child and is nonrefundable. OUCH! WENT FROM $1OOO TO $500
g. The exclusion for employer provided adoption assistance is eliminated, and the adoption credit reverts to the lower $6,000 limit and applies only to special needs adoptions.
h. The dependent care credit eligible expense limit and applicable percentage decrease.
i. The standard deduction for married couples is no longer 200% of that for single individuals. SO WE’RE BACK TO HAVING THE “MARRIAGE PENALTY” AGAIN.
j. The upper limit on the 15% tax bracket for married couples is no longer 200% of the upper limit applicable for single individuals.
k. Expiration of the higher income phase out levels for earned income credit (EIC).
l. Expiration of the exclusion for employer provided educational assistance.
m. Reinstated restrictions on the deduction of student loan interest; 60 months, lower phase out levels. IF YOU TAKE THE 20 YR REPAYMENT OPTION, NO DEDUCTION FOR INTEREST PD AFTER 5 YRS
n. Restored limitations on Coverdell educational savings accounts; $500 per year, limited expenses, lower phase out.
o. National Health Service Corps Scholarships and the F. Edward Herbert Armed Forces Health Professions Scholarship and Financial Assistance Programs no longer excludable.
p. The top exemption amount for estate tax drops to one million and the top rate increases to 55%.
9. For EIC purposes, income is not excluded from earned income merely because it is excluded from gross income. As such, amounts that are otherwise excluded from gross income are added back for
EIC purposes. This includes the rental value of a parsonage of an active minister, meals furnished for the convenience of the employer, excluded adoption benefits, voluntary salary deferrals, salary reduction under a cafeteria plan, nontaxable combat pay, nontaxable housing and subsistence allowances received by military members.
10. The exclusion of debt cancellation income under §108(a)(1)(E),qualified principal residence indebtedness, is no longer available.
As you can see, there is good reason for there to be a buzz surrounding the changes. However, as we pointed earlier, we’ve gone through this—and worse (in the olden days, there was a tax bracket that was around 50%!). Don’t panic. Read, watch and listen for the final changes, and if you feel like some of these provisions really mean a lot to you, contact your senator or representative.
For more of the same, read our other blog posted on 9/18, “2013 is Coming…Are You Ready?” and news articles we post on a regular basis.
Category: Bookkeeping
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