At the beginning of 2012, new tax provisions have been enacted; some have been extended that were set to expire, while others have disappeared. This letter serves as an outline of the major tax law changes you should be aware of to minimize taxes for 2012. Please note that some of the changes below could be altered again by Congress this year.
New for 2012
•Full-Year Extension of Payroll Tax Break: In December 2011, a temporary two-month extension of the 4.2% Social Security payroll tax rate cut for individuals was enacted that covered January and February 2012, but was extended throughout all of 2012 under legislation signed into law in February 2012.
Expiring in 2012
• Phase-out’s of itemized deductions and personal exemptions: The overall limitation on itemized deductions for taxpayers with AGIs above a threshold amount does not apply 2012. The phase-out for personal exemptions for higher income taxpayers also does not apply in 2012.
• Education credit: The American Opportunity Credit replaced the Hope Education Credit for 2009 through 2012 only. The benefits of the new credit are:
(1) Required course materials, such as books qualify.
(2) The credit is increased to up to $2,500.
(3) Income level phase-out’s are higher.
(4) Forty percent of the credit is refundable.
• Lower capital gains rates: The 15% capital gains rate (0% for taxpayers below the 15% tax bracket) is scheduled to increase to 20% in 2013. Qualifying dividends taxed at reduced capital gains rates will be taxed at ordinary income rates beginning in 2013.
• Increased first-year asset expensing: For 2012, the amount eligible for asset expensing is $139,000 (as indexed for inflation). Beginning in 2013, the amount is reduced to $25,000.
• Refundable portion of child tax credit: The earned income formula for the determination of the refundable child credit applies to 15% of the taxpayer’s earned income in excess of $3,000. This allows more earned income to qualify in order to determine how much of the credit is refundable. Beginning in 2013, the amount will be considerably higher.
• Lower income tax rates: Legislation in 2001, reduced the tax rates on ordinary income through 2010. Legislation in 2010 extended the lower rates through 2012. The current rates of 10%, 15%, 25%, 28%, 33%, and 35% could all change beginning in 2013.
• Higher earned income tax credit: The temporary increase in the EITC percentage from 40% to 45% for families with three or more qualifying children ends in 2012. Additionally, the marriage penalty relief, through an increased threshold phaseout amount for married couples filing joint returns, also expires.
• Child tax credit dollar amount: The $1,000 per qualifying child credit amount is set to be reduced to $500 beginning in 2013.
• 50% bonus depreciation: The additional first-year depreciation for 50% of basis of qualified property.
• Estate tax: Increase in estate and gift tax exemption to $5,120,000 (as indexed for inflation).
Expired in 2011
• Nonbusiness energy property credit: A 10% credit (up to $500, less if any credit was taken in a previous year) is available if you make certain energy efficient improvements to your home. Such improvements include high-efficiency heating and air conditioning systems, water heaters, windows (limited to $200), skylights, doors, insulation and roofs. The improvements must be made to an existing principal residence. A manufacturer’s certificate must accompany the qualifying property.
• Increased AMT exemption amounts: For 2011, the AMT exemption amounts were $74,450 for married filing jointly, $37,225 for married filing separately, and $48,450 for singles and heads of household. For 2012, the exemption amounts are significantly lower (unless Congress acts to adjust): $45,000 for married filing jointly, $22,500 for married filing separately, and $33,750 for singles and heads of households.
• Nonrefundable personal credits offsetting AMT: Only through 2011 could nonrefundable personal credits offset a taxpayer’s alternative minimum tax. However, this rule does not apply to the adoption credit, the child tax credit, the saver’s credit, the residential energy efficient property credit, and the American Opportunity credit, among others.
• Deduction for state sales taxes: The election to deduct as an itemized deduction state and local sales taxes instead of state and local income taxes.
• Educator expense deduction: The $250 above the line deduction for qualifying educators for expenses paid for books and supplies used in the classroom.
• Tuition expenses: The above-the-line deduction for qualified tuition and related expenses.
• D.C. first-time homebuyer credit: Purchases made before January 1, 2012, qualify for the $5,000 D.C. first-time homebuyer credit.
• Charitable contributions from IRA accounts: The ability to distribute up to $100,000 tax free to charity from an IRA maintained for an individual whose has reached age 701/2.
• Research credit: The tax credit for research and experimentation expenses.
• 100% bonus depreciation: The additional first-year depreciation for 100% of basis of qualified property.
• First-time homebuyer credit: First-time homebuyers (including long-term residents) who are certain military personnel on official extended duty outside the U.S. are eligible for the tax credit if the purchase contract is entered into before May 1, 2011, and closing takes place before July 1, 2011.
While there are other minor changes that have taken place from 2011 to 2012, the above list represents tax changes that most likely will impact your 2012 taxes. You also should be aware that Congress is in the middle of deliberations that could lead to the extension of some of the above-mentioned expired or expiring tax provisions.