We usually try and keep these dispatches light and entertaining. We know you'd rather read about "Tax Strategies for Somali Pirates" than, say, the latest regulations governing domestic international sales corporations. But every so often it's time to put on our serious face, and this is one of those times.
By now, of course, we all know that Congress spent their New Year's crafting a last-minute deal to avoid a "fiscal cliff" disaster. The "American Taxpayer Relief Act of 2012" extended the Bush tax cuts, permanently, for incomes up to $400,000 for single filers and $450,000 for joint filers. Ordinary income above those thresholds will be taxed at 39.6%; corporate dividends and long-term capital gains will be taxed at 20%. The Alternative Minimum Tax is "patched" for good, and the estate tax is eliminated for estates under $5 million.
If your income isn't quite that high, you may think you've just dodged a bullet. But the sad reality is, you're probably already paying more tax, even if your income is nowhere near $400,000:
- The fiscal cliff legislation includes provisions phasing out personalized exemptions and itemized deductions for singles earning over $250,000 and joint filers earning over $300,000. You'll lose 2% of your personal exemptions for every $2,500 over the threshold. And you'll lose $3 of your itemized deductions, up to 80% of the total, for every $100 of income above the thresholds.
- The 2% payroll tax "holiday" that we enjoyed in 2011 and 2012 is over, and won't be coming back.
- Finally, the new Medicare tax provisions of the Affordable Care Act take effect. Medicare taxes on earned income go from 2.9% to 3.8% on incomes above $200,000 ($250,000 for joint filers). And there's a new "unearned income Medicare contribution" on "Investment income" (interest, dividends, capital gains, rents, royalties, and annuities) above those same thresholds. Here's the bottom line. If you woke up on January 2, read the headlines, saw "$400,000," and thought you were safe, think again.
On the bright side, fiscal cliff legislation extends all sorts of tax breaks that were in danger of expiring. These include expanded first-year expensing and bonus depreciation deductions for business equipment, tax-free charitable gifts from IRA accounts, expanded student loan interest, and even the above-the-line deduction for educator expenses. The bill even extends a critical break for NASCAR track owners, letting them write off land improvements and support facilities over just seven years instead of fifteen! (If you happen to own a "motorsports entertainment complex," you really need to call us for planning!)
The tax provisions of the fiscal cliff legislation run over 80 pages. Even the Senate explanation takes up 15 pages. So we're still doing our homework and sorting out all the opportunities. But we can promise you that we're here to help make the best of the new law. And remember, we're here for your family, friends, and colleagues, too!
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