When President Obama signed the American Taxpayer Relief Act (ATRA) into law in January, the much-feared “fiscal cliff” was avoided, for the most part.
Smart Business spoke with Jim A. Forbes, CPA, a principal with Skoda Minotti’s Tax Planning & Preparation Group, about five key elements of the act affecting both individual taxpayers and businesses.
What item most benefits individuals?
Signage of the act provides permanent relief from the Alternative Minimum Tax (AMT). If the AMT ‘patch’ had not been put in place, as many as 30 million taxpayers could have been affected. Fortunately, a permanent AMT patch has been put in place.
Retroactively, effective for tax years beginning after 2011, the AMT exemption amounts (and indexes for inflation) have been permanently increased to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. This means that, for a single person, the first $50,600 of income is exempt from the AMT calculation.
Do any items have a negative effect on individual taxpayers?
Overall, passage of the act positively impacts most individual taxpayers. The return of the phase-out of itemized deductions and personal exemptions, though, could have a negative impact.
The Personal Exemption Phase-out (PEP) is reinstated with a starting threshold for those making $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married taxpayers filing separately. For 2013, you’ll be able to deduct $3,900 for yourself, your spouse and your dependents. However, if you are over these thresholds, the value of each personal exemption is reduced by 2 percent for each $2,500 above the specified income thresholds. So a married couple making $400,000 would see a $2,000 cut in their personal exemptions.
Also, the ‘Pease’ limitation on itemized deductions was reinstated, with starting thresholds that are the same as for the PEP. For taxpayers subject to the ‘Pease’ limitation, the total amount of their itemized deductions is reduced by 3 percent of the amount by which the taxpayer’s adjusted gross income (AGI) exceeds the threshold amount, with the reduction not to exceed 80 percent of the otherwise allowable itemized deductions. For example, a married couple with income of $400,000 filing their tax return with $50,000 of itemized deductions would see about a $3,000 reduction in their itemized deductions, resulting in about $1,000 more in tax.
How are higher income individuals affected?
The regular tax rate and dividend/capital gains tax rate both increased for higher income individuals. The income tax rates for individuals will stay at 10, 15, 25, 28, 33 and 35 percent, but now a 39.6 percent rate applies for income above $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married taxpayers filing separately. The top rate for capital gains and dividends permanently rises to 20 percent for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). When combined with the new 3.8 percent Medicare surtax on investment income, the overall rate for higher income taxpayers will be 23.8 percent.
What are some of the ways that businesses are affected?
Two that are applicable to most businesses are the extension of bonus depreciation and the increase in Section 179 deduction.
The act retroactively extended 50 percent bonus depreciation for property placed in service before Jan. 1, 2014. And some transportation and longer period production property is eligible for 50 percent bonus depreciation through 2014. In other words, businesses can deduct 50 percent of the cost of the property while deducting the remainder of the cost of the property over its useful life. Plus, bonus depreciation can be used to create a loss. The Section 179 deduction can now be taken on new or used property up to $500,000, allowing businesses to fully deduct the cost of the property in the year it acquires it instead of deducting a portion of cost over its useful life. Previously, the deduction could only be applied to new or used property up to $139,000.
Jim A. Forbes, CPA, is a principal at Skoda Minotti. Reach him at (440) 449-6800 or email@example.com.
Contact: Have questions on how the American Taxpayer Relief Act affects you or your business? Contact our Tax Planning & Preparation Group at (440) 449-6800.
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Ohio legislators are considering tax law changes that would relieve headaches for companies that do business across many municipal boundaries.
While Ohio has a uniform law limiting how a municipality may tax, it serves only as a ceiling for what a city may do. Cities can and have imposed their own rules and treatments within those guidelines.
Nonuniform municipal rules and multiple filings have made it difficult for companies to determine what taxes they owe and have deterred others from doing business in the state, says Joseph R. Popp, JD, LLM, tax supervisor at Rea & Associates.
“One of the challenges is the definition of a day. Are you working in a municipality for a day if you’re present at all, or do you have to work half of the day, or the full day? What if your workers pick up a truck at your office and then spend the rest of the day outside that city?” Popp says.
“Cities are taking different approaches, which could result in multiple cities trying to tax you for the same day,” he says. “That’s an example of the complexity that businesses are facing and why they feel that the Ohio municipality taxation structure is burdensome.”
In addition to creating uniform definitions, House Bill 601 would eliminate the need to file tax returns in cities where less than 1 percent of your income is allocated and the tax owed is less than $50. It would also change rules regarding a “free pass” that has been given in cases when workers spend fewer than 12 days in a city. That would be extended to 20 days, and tax would then be collected going forward only.
Smart Business spoke with Popp about the problems posed by current municipal tax laws and what proposed legislation would do to rectify the situation.
What types of businesses does this affect?
Those that are mostly going to be affected will be service-based groups — those that do cable TV installation or something service-based that would take company representatives to many different municipalities while working under the same business umbrella. Temporary agencies that have people going to multiple locations would also be a business group that would have interest in this.
Are there things businesses should do in preparation for the bill’s passage?
Businesses should consider looking at where they might have done things wrong in the past.
A client of ours has a real estate rental company and thought it was in a jurisdiction where tax was not due. However, we found that it was in city limits and tax was due to the city. We’ve prepared returns showing this taxpayer owes $20,000 for a couple of different years. Because of that city’s interest and penalty structures, the client will pay another $20,000 in penalties and interest. Under the new rule, the city would be limited to imposing only $4,000 in penalties and interest, although it’s not clear if the new legislation would be a retroactive change.
So, companies may want to see if there are opportunities to leverage the rule change and end up paying less to the municipality. The municipality may not like the rule change and it wants to get as much tax, interest and penalties as it can now, so that opens up another bargaining chip for businesses to use in their negotiations with a municipality’s tax administrator.
Is the legislation likely to pass?
Yes, and the reason for this confidence stems from how this came about. The major cities are on board with this, the Ohio Society of CPAs is presenting the professional point of view and the members of the legislature are involved in the process. There was a lot of effort put forth to ensure that there was agreement and buy-in by all interested parties.
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Joseph R. Popp, JD, LLM is a tax supervisor at Rea & Associates. Reach him at (614) 923-6577 or firstname.lastname@example.org.
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Although Congress passed the last-minute fiscal cliff tax deal in a seemingly haphazard way, many changes in the American Taxpayer Relief Act of 2012 will have both positive and negative impacts on executives, says Elizabeth Bunk, partner-in-charge of Houston Tax and Strategic Business Services at Weaver.
“Unlike the Congressional change two years ago, the American Taxpayer Relief Act of 2012 provides permanent changes to certain tax rates and exemption levels,” she says. “Therefore, we won’t be in the same situation again two years from now because many of these tax changes won’t expire. This will allow executives to plan for their future taxes with greater confidence.”
Smart Business spoke with Bunk about what executives need to know about their tax considerations for 2013.
What is the new maximum rate?
Congress added a top income tax rate of 39.6 percent for those with an annual income of more than $400,000 for single filers and more than $450,000 for joint filers. They also kept the same rates of 10, 15, 25, 28, 33 and 35 percent that were available in prior years. Therefore, executives earning above the $400,000 or $450,000 threshold will pay an additional 4.6 percent on the portion of their income that exceeds the highest bracket limit. While it was widely anticipated that income tax rates on high-income earners would increase in 2013, executives can at least be pleased that the final version of the act doubled the threshold amounts at which the 39.6 percent rate begins from the often-mentioned $200,000 and $250,000 threshold amounts.
How are capital gains and dividend rates handled?
Following the same threshold — $400,000 and $450,000 — the capital gains and dividend rates permanently increased from 15 to 20 percent. It is also important to note that higher income taxpayers will get hit by the new 3.8 percent surtax on investment income imposed by the Patient Protection and Affordable Care Act. This surtax, which applies at an income threshold of more than $200,000 for single filers and more than $250,000 for joint filers, will bring the final tax rate on capital gains and dividends to 23.8 percent.
How will health care reform impact other income?
Starting in 2013, high-income taxpayers will be subject to a brand new Medicare tax on their unearned income. The 3.8 percent surcharge applied to capital gains and dividends, as mentioned above, is applied to other investment income as well. A different set of limits — $200,000 for single and $250,000 for those married filing jointly — are the baseline for the surtax to apply. Taxpayers whose adjusted gross income exceeds the threshold will be subject to this tax. This surcharge combined with the increased maximum tax bracket could mean that some taxpayers are paying 43.4 percent on their highest levels of income.
What other provision is noteworthy?
A key provision to be aware of is the reinstatement of the phase out for itemized deductions and exemptions. Itemized deductions, which had avoided phase out during 2010 through 2012, will now be subject to severe limits, depending on income levels. Total itemized deductions in 2013 and beyond, which include real estate taxes, mortgage interest and charitable contributions, will be reduced by 3 percent of the amount by which a taxpayer’s AGI exceeds a threshold of $250,000 for single taxpayers and $275,000 for those married and filing jointly. The reduction cannot exceed 80 percent of the total deductions.
What’s the overall impact?
For many executives, these provisions are probably what they anticipated. There are certainly some negative changes in the act, but there are at least two positive results:
1. Permanent changes to tax rates, including the dividend and capital gain rates.
2. Applying the new top income tax rate to a threshold amount that is double what was originally predicted.
These positives should at least slightly raise revenue without significantly raising taxes for all Americans.
Elizabeth Bunk, CPA, CFP, is partner-in-charge, Houston Tax and Strategic Business Services at Weaver. Reach her at (832) 320-3220 or Elizabeth.Bunk@WeaverLLP.com.
Our coverage of the fiscal cliff law continues next month with more insight into how these taxes will interact with those related to health care reform.
For more information about the fiscal cliff law’s impact to businesses and individuals, see the articles on Weaver’s website: http://weaverllp.com/News.aspx.
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