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What Does Last Night’s Legislation Mean For You And Your Business?

Late last night, the US House of Representatives agreed with a previously approved Senate action and temporarily averted the much discussed “Fiscal Cliff.” According to White House statements, it would appear certain that the President will sign the bill. In addition to the making permanent certain tax rate cuts originally enacted in 2001, many tax provisions which were scheduled to expire after 12-31-2012 were extended.

Below is our summary of some of the more significant of the actions taken in this legislation.

Income Tax Rates

Tax brackets and rates are to remain the same as they have been for taxpayers whose taxable income does not exceed $400,000 (single) and $450,000 (joint). For those above that income level, the top bracket will be taxed beginning in 2013 to a 39.6% rate.

Estate Tax Rates

The new law will make permanent the current $5 million per spouse exemption from the estate tax, indexed for inflation. The rate, however, will be 40%, up from 35%. A “portability” rule allowing a spouse to transfer his or her estate tax exemption to a surviving spouse has also been made permanent.

Alternative Minimum Tax (AMT)

The alternative minimum tax “patch” has been made permanent. The AMT exemption amount is raised to $50,600 (single) and $78,750 (joint) in 2012, and will now be indexed for inflation. This will save millions of taxpayers from becoming subject to the alternative minimum tax.

Payroll Tax Holiday

The 2% payroll tax cut on the FICA tax of employees which has been in effect was allowed to expire. It is estimated that this will increase taxes on about 77% of all households, according to the nonpartisan Tax Policy Center, as reported by Bloomberg BNA.

Tax on Capital Gains

Taxpayers who earn below the $400,000 and $450,000 amounts (see above) will continue to pay tax on their capital gains and dividends at a reduced 15% rate; those with taxable income above these amounts will pay a maximum of 20% of regular income tax. However, due to the 3.8% tax on “investment income” included in the 2010 “Obamacare” act, high income taxpayers will actually be paying 23.8%.

Individual and Business Tax Break “Extenders”

There are always certain tax breaks which are set to sunset at some future date (see

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some of the items above which have been made permanent). Often they will be extended year by year. Here are examples of some which have been included in this bill:

Individuals

  • Retain the child care credit at $1,000, refundable subject to limits.
  • Above the line deduction of up to $250 for teacher classroom expenses
  • Premiums for mortgage insurance deductible as interest
  • Deduction for qualified tuition and related expenses
  • Deduction for State and local general sales taxes (if larger than the deduction for state income taxes)
  • Tax free distributions from IRAs to certain public charities for individuals age 70 ½ or older, not to exceed $100,000 per year, with transition rules

Business

  • Work opportunity tax credit
  • 15 year straight line cost recovery for qualified leasehold, restaurant and retail improvements
  • Increase in Section 179 expensing amounts and threshold limits ($500,000 basic write-off, with limit when purchases of all assets exceeds $2,000,000)
  • Extension and modification of bonus depreciation (basically continues the 50% write-off)

More to come

The tax parts of this law are complex and lengthy, which is the norm for such legislation, so these points are just some of what it contains. We’ll keep in touch with this and other developments. We appreciate you as our client, and want you to be as informed as possible.

Potts & Company

Certified Public Accountants