Federal Tax Code Changes for 2012
Exemption Allowance for 2012 is $3,800 (Amount for 2013 is $3,900)..
Joint & Surviving Spouse - 11,900
Head of Household - 8,700
Single & Married, Separate - 5,950
Additional amount for those at least 65 and/or blind
Joint & Surviving Spouse - 1,150
All others - 1,450
Dependent Standard Deduction
Base Amount - 950
Additional Amount - 300
(adds to earned income)
Medical Care Reimbursements from employer-provided health insurance are generally extended to children of employees who have not reached the age of 27.
- Also applies to self-employed individuals whose dependents are covered by health insurance.
- Child no longer has to qualify as a dependent.
For the self-employed -- health insurance paid on behalf of proprietor, spouse or eligible children under the age of 27 would generally be deducted as an adjustment on Form 1040.
Capital Gain Rates: Current rates have been extended through the end of 2012.
Security Sales: In 2012 every broker that is required to issue an information return as part of a covered security transaction must include on the information return, if feasible, the adjusted basis of the client in the security sold and whether any gain or loss is short-term or long-term.
Foreign Account Reporting Requirements (FBAR).
- Applies to any United States person who has a financial interest in or signature or other authority over any foreign financial accounts if the aggregate amount in these accounts exceeds $10,000 at any time during the calendar year. Penalties for non-compliance are severe.
- Form TD F 90-22.1 is used to fulfill reporting requirements.
Bonus Depreciation: Bonus depreciation limit is 50% (subject to limitations) and has been extended through 2013.
Section 179 Expense: Limit is $500,000 and has been extended through 2013.
Mileage Rates for 2012: Moving and Medical are 23 cents. Charitable mileage remains at 14 cents. Business travel is 55.5 cents.
American Opportunity Credit: Credit has been extended through tax year 2017.
Above the Line Tuition Deduction: Credit has been extended to end of 2013.
Coverdell Educational Accounts: Coverdell accounts are used to put aside money to pay for future educational expenses of taxpayer’s children. Account is similar to a Roth IRA in that it is not deductible but is not taxable upon withdrawal if requirements are met. $2,000 contribution limit has been extended through 2012.
Teachers’ $250 Above-The-Line Deduction: This deduction has been extended through 2013.
Child Tax Credit has been extended in its present form through 2017.
Roth IRA AGI Conversion: The $100,000 modified AGI limit on conversions of traditional IRAs to Roth IRAs is eliminated, and married taxpayers who file separate are now allowed to convert traditional IRA funds into a Roth IRA.
For conversions made in 2010 taxpayer can elect to choose between;
- Including income on 2010 return, or
- Including one- half the conversion income in 2011 and one- half in 2012.
First-Time Homebuyer Credit Recapture
Taxpayers who received credit in 2008 must generally recapture credit over a period of fifteen years beginning in tax year 2010. For 2012 there is no longer a First-Time Homebuyer Credit on the State or the Federal.
Homeowner Energy Credit has now been reduced to generally a 10% credit of eligible energy-saving improvements, up to a maximum lifetime credit of $500.
Alternative Minimum Tax
|AMT Exemption Amounts||Exemption||Phase Out
||Full Phase Out|
|Joint & Surviving Spouse||78,750||150,000||447,800|
|Single & Head of Household||50,600||112,500||306,300|
AMT Offset for Nonrefundable Personal Credits (Credits which may offset AMT)
These credits include:
- Dependent Care Credit;
- Credit for the Elderly and Permanently Disabled;
- Adoption Credit;
- Child Tax Credit;
- Mortgage Credit;
- Hope, American Opportunity, and Lifetime Learning Credit;
- Lower Income Saver’s Credit;
- Residential Energy Efficient Property Credit;
- Alternative Motor Vehicle Credit.
- For 2012 there is a $5 million per person exemption with a top tax rate of 35%.
- The above applies to estate, gift and generation skipping taxes.
- There is also a provision through 2012 that permits the executor of a deceased spouse’s estate to transfer any unused personal exemption to the surviving spouse.
Third-Party Payment Transactions
Beginning in 2012 banks and other payment settlement entities will make an annual information report to the IRS (Form 1099-K) that will enable the IRS to determine a business’s gross income from credit and debit card sales.
Foreign-earned Income Exclusion:
A U.S. individual living overseas may possibly exclude up to $95,000 of foreign income if taxpayer satisfies either the “bona fide” foreign residence test or the foreign physical presence test. The exclusion applies separately to spouses.
Long-term Care Insurance:
Up to $4,370 in premiums paid for long-term care insurance, per person, can qualify as a deductible medical expense.
For 2013, the maximum is $4,550.
Reminder: deduction is limited based on the taxpayer’s age and only premiums paid for “qualified long-term care” plans are deductible.
For tax year 2012 the adoption credit and the adoption exclusion are $12,650. Both are phased-out ratably when adjusted gross income is from $189,710 - $229,710.
Residential Energy Efficient Property Credit: the credit is 30% for installation of qualified solar water heating property, qualified solar electric property, geotherman heat pumps, and small wind energy property. The credit applies for property placed in service through the end of 2016. Eligible expenditures include installation costs. The property must be installed in a taxpayer’s residence in the United States (does not need to be the principal residence).
The taxpayer may rely on the manufacturer’s certification that the energy efficient property meets the requirements for claiming the credit.
Earned Income Credit:
The phase-out range for the earned income credit for 2012 is as follows:
|Qualifying children||Other than joint||Joint returns|
|none||$7,770 - $13,980||$12,980 - $19,190|
|one||$17,090 - $36,920||$22,300 - $42,130|
|two||$17,090 - $41,952||$22,300 - $47,162|
|three or more||$17,090 - $45,060||$22,300 - $50,270|
The earned income credit is reduced by a percentage of the amount by which earned income (or AGI, if higher) exceeds the phaseout amount.
Nanny Tax: For tax years 2012 and 2013 the “nanny tax’ threshold is $1,800.
Health Care Act: Considered to be the provisions included within the “Patient Protection and Affordable Care Act of 2010” and the “Health Care and Education Reconciliation Act of 2010” or as commonly known as “Obamacare”.
The first provisions took effect in 2010 and the remaining regulations are phased in through 2018.
The overriding concept of this health care act is that all individuals, with certain exceptions, shall obtain health care coverage or be required to pay a penalty.
For those individuals who do not have health insurance coverage through their employer, health insurance “exchanges” shall be established through which health insurance may be obtained.
A few of the many important provisions are:
- Medicaid expansion to cover people with incomes below 133% of the poverty line
- Premium assistance and cost sharing to individuals who are not covered under an employer plan and who are below certain household income thresholds
- Requires insurance plans to offer coverage to young adults under the age of 27 on parents’s policies
- Prohibits lifetime caps on insurance coverage
- Prohibits plans for excluding coverage for preexisting conditions
- Prohibits plans from rescinding coverage
- Establishes the share of premiums that must be dedicated to medical services
- Requires insurance plans to cover certain preventive care without cost-sharing including immunizations and specified screening for certain conditions
Two of the revenue raising provisions of this health care act that will take effect in 2013 are:
An additional .9% medicare tax on a taxpayer’s earned income over a threshold amount of:
$250,000 for joint returns,
$125,000 for married filing separate,
$200,000 for all others
An additional 3.8% medicare tax on investment income over the same above threshold amount.
Example: Susie is single and has $100,000 in interest income which is her only investment income. She would not be subject to the tax since her investment income is under the $200,000 threshold.
However, if Susie is earning W-2 wages of $120,000 plus the investment income, then $20,000 of the investment income would be subject to the 3.8% tax.
Investment income is considered to be:
- Dividends, interest, annuities, royalties, and rents, less allocable deductions
- Net taxable gain attributable to the disposition of property other than property held in a trade or business to which the medicare tax does not apply. On the sale of a personal residence only the part of the gain that exceeds the personal residence exclusion would be considered investment income.
Qualified transportation fringe benefits exludable from wages (certain restrictions apply):
- Vanpool: Excludable amount is $125
- Transit passes: Excludable amount is $125
- Parking: Maximum exclusion is $240 per month
- Bicycles: Excludable up to $20 per month
Merchant credit card reconciliation (form 1099-k):
IRS will not be requiring businesses to reconcile their gross receipts with merchant card transactions reported on form 1099-k, merchant card and third party network payments, on their 2012 or later returns.
The IRS provides a six digit identity protection personal identification number (IP PIN) to victims of tax-related identity theft who have had their identities verified by the IRS. The IP PIN helps to prevent the misuse of taxpayer’s social security number or taxpayer identification number on income tax returns and will avoid delays in processing the tax returns of identity theft victims.
For E-filed returns, tax software will indicate where to insert the IP PIN.
For paper returns, taxpayers must enter the IP PIN in the six boxes to the right of the spouse’s occupation in the signature section.
If two taxpayers are married filing jointly and both taxpayers receive an IP PIN, only the spouse that is listed first on the return should input an IP PIN. The IRS will send a new IP PIN each year for three tax years after the identity theft.
Real estate recapture: Be on the lookout for homeowners who received the first-time homebuyer credit in 2008 and are repaying the credit over 15 years. If you are preparing a new client’s return the credit amount must be entered into software.
Retirement plans: the 2012 contribution limit for 401k, 403b, sarsep, and 457 plans is $17,000. The additional catch-up contibution for taxpayers age 50 and over is $5,500.
A 403b plan is a tax-advantaged retirement savings plan avalable for public education organizations, some non-profit employers, cooperative hospital service organizations, and self-employed ministers in the United States.
A 457 plan is a type of non-qulified tax advantaged deferred-compensation retirement plan that is available for governmental and certain non-governmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pre-tax basis.
A sarsep plan is a simplified employee pension plan that was established before 1997.
California State Tax Code Changes and Updates for Tax Year 2012
Dependent Exemption Allowance for 2012 is $321.00
Personal Exemption (Single, MFSep, H of H) $104.00 – (M, Joint; Widower) $208.00 Blind $104, Age 65 or over $104
Proposition 30 passed, taxes retroactively for 2012 in California on high earners.
Phaseout of Exemption Credits Reduced by $6 for each $2,500 ($1,250 for Married, filing separate) in excess of federal AGI amounts of:
Single; Married, filing separate - $169,730
Head of Household - $254,599
Married, filing joint: Qaulfying Widower - $339,464
Joint, Head of Household - $7,682
Single & Married, Separate - $3,841
Minimum standard deduction for dependents is $950.
Itemized Deductions: Reduced by the lessor 6% of the excess of the of the taxpayer’s federal AGI over the threshold amount or 80% of the amount of itemized deductions otherwise allowed for the taxable year. Threshold amounts are:
Single, married, filing separate - $169,730
Head of Household - $254,599
Married, joint or Qualifying Widower - $339,464
New Jobs Credit: Form 3527
This credit actually became effective at the beginning of 2009 but has been somewhat overlooked. California has allocated $400 million dollars but a large portion of credit still has not been used
- Up to $3,000 for each additional full-time employee hired;
- For small businesses with less than 20 employees at the end of the preceeding year;
- Credit is prorated on an annual full-time equivalent basis for employees employed less than a year;
- Credit must be claimed by individual or business on a timely filed return before the credit has been used up.
- Each qualified full-time hourly employee is paid wages for not less than an average of 35 hours per week
- There is a net increase in qualified full-time employees compared to the number of full-time employees employed in the preceding taxable year..
Employees who are not eligible would be those who are:
- Certified as a qualified employee in an enterprise zone or targeted tax area;
- Certified as a qualified disadvantaged individual in a manufacturing enhancement area;
- Certified as a qualified disadvantaged individuall or qualified displaced employee in a local agency military base recovery area.
- An employee whose wages are included in calculating any other credit allowed.
New Home and First-Time Buyer Credit:
Taxpayers receiving either credit were to allocate amount over three years beginning in 2010.
Be careful not to miss credit in 2012!
Federal and State Tax Code Changes for 2013
A top tax rate of 39.6% (up from 35%) will be imposed on individual making more than $400,000 a year, $425,000 for head of household, and $450,000 for married filing joint.
The 2% Social Security tax reduction is now history (ended 12/31/2012).
The maximum capital gains tax will rise from 15% to 20% for individuals taxed at the 39.6% rates (those making $400,000, $425,000, or $450,000 depending on filing status, as noted above).
The itemized deduction phase-out is reinstated, and the personal exemption phase-out is reinstated, but with different AGI starting thresholds which have beenadjusted for inflation: $300,000 for married filing joint, $275,000 for head of household, and $250,000 for single.
The estate tax will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples) but will be applied at a higher 40% rate (up from 35% in 2012).
In 2013 Hospital Insurance rate (Medicare) will increase by .9% (currently at 1.45%) for individual taxpayers whose income exceed a certain amount (Single, $200,000; married filing joint, $250,000; married filing separate, $ 125,000).
The $1,000 Child Tax Credit, the enhanced Earned Income Tax Credit, and the enhanced American Opportunity Tax Credit will all be extended through 2017.
The following deduction and exclusions are extended through 2013:
- Discharge of qualified principal residence exclusion;
- $250 above-the-line teacher deduction;
- Mortgage insurance premiums treated as residence interest;
- Above-the-line deduction for tuition; and
- IRA-to-charity exclusion (plus special provisions allowing transfers made in January 2013 to be treated as made in 2012)
- The Research Credit and the production tax credits, amount others, will be extended through 2013;
- 15 year depreciation and 179 expensing allowed on qualified real property through 2013;
- Work Opportunity Credit extended through 2013;
- Bonus depreciation extended trough 2013; and
- The 179 expense deduction limitation is $139,000 for 2012 and 2013.