With the tax preparation season upon us, it's imperative to be aware of the tax law changes.
To that end, tax saving strategies were discussed recently with members of the Palmerton Area Chamber of Commerce and Greater Northern Lehigh Chamber of Commerce as part of a joint luncheon.
Gary Frey, a certified public accountant of Frey & Co. CPA's, Walnutport, focused his presentation on the American Taxpayer Relief Act of 2012, and noted the Social Security Tax cut has expired.
Frey said the employee portion of the Social Security Tax went from 4.2 percent to 6.2 percent, which was in law from Jan. 1, 2011 through Dec. 31, 2012. That resulted in a tax increase of $1,000 for someone making $50,000, he said.
Individual Income Tax Rates are 39.6 percent for an individual with over $400,000 in taxable income, and for Married Filing Jointly, over $450,000 in taxable income.
Without the Marriage Penalty Relief, the standard deduction for married couples would be 167 percent of the deduction for single individuals, rather than 200 percent. The 2010 Tax Relief Act extended this relief through 2012.
The Capital Gains/Qualified Dividends Tax is 20 percent for those taxpayers in the 39.6 percent tax bracket.
Frey then discussed Permanent Alternative Minimum Tax Relief. Prior AMT exemption increases had to be extended by Congress. As a result, AMT increases are annually indexed for inflation.
The 2012 Exemption amounts are $50,600 for single filers, and $78,500 for married. An estimated 26 million taxpayers would have been subject to AMT without this extension.
It was noted that Acting IRS Commissioner Steven Miller estimated that 80-100 million taxpayers may experience a delay in filing their 2012 returns if Congress failed to enact an AMT patch before year end.
Personal exemptions have been phased-out of itemized deductions and personal exemptions as follows: $300,000 for filing married, jointly and surviving spouses; $275,000 for filing head of household; $250,000 for unmarried taxpayers; and $150,000 for married filing jointly.
As for Federal Estate and Gift Taxes, $5 million lifetime exclusion indexed for inflation, where the top rate goes to 40 percent, up from 35 percent. The State and Local Sales Tax Deduction extends this itemized deduction through 2013. Taxpayers in a state with no income tax can use this deduction.
The Child Tax Credit extends the $1,000 child tax credit permanently, and is for a qualifying child younger than 17. The phase-out is at $75,000 for single filers, and $110,000 for joint filers.
In addition, the Earned Income Credit makes permanent the Earned Income Credit for low income taxpayers.
A permanent extension of Adoption Credit for adoption expenses is up to $10,000. Special needs adoption automatically qualifies for $10,000 credit, regardless of the amount spent.
The Child and Dependent Care Tax Credit is $3,000 of expenses for one child, and a maximum of $6,000 for two children.
Education Incentives include the American Opportunity Tax Credit, which provides credit for the first four years of college up to $2,500 per student; tuition and fees deduction, a maximum of $4,000 per taxpayer; student loan interest deduction, which extends a $2,500 deduction for student loan interest not subject to the five year rule; and Coverdale Education Savings Accounts, which gives $2,000 per year for elementary, secondary and post-secondary education.
Phase outs of education incentives are as follows: American Opportunity Tax Credit, single, $80,000, joint, $160,000; tuition and fees deduction, $65,000, joint, $130,000; student loan interest deduction, single, $75,000, joint, $150,000; and Coverdale Education Savings Accounts; single, $95,000, joint, $190,000.
There is also a Teacher Classroom Expense Deduction of up to $250 per year for teachers who buy supplies for their classrooms.
A cancellation of indebtedness income is included in income unless an exclusion applies. This provides an exclusion up to $2 million on cancellation of indebtedness, and makes short sales still viable.
Mortgage Insurance Premiums treats Mortgage Insurance Premiums as deductible interest as an itemized deduction.
An IRA Distribution to Charity states that an individual 701/2 or older can do a tax-free distribution to a public charity up to $100,000 per year.
Energy Incentives, such as Energy Credits for Energy Efficiency Improvements, is $500 per lifetime, and includes windows, doors and insulations. There are also renewable energy credits for geothermal and solar systems.
Frey then discussed Business Tax Provisions, whereby Code Sect. 179, Small Business Expensing, increased the 179 Limit for 2012 and 2013 to $500,000. It would have been $138,000 in 2012.
Patient Protection and Affordable Care Act includes 2013 Provisions such as Unearned Income Medical Contribution, whereby a 3.8 percent surtax is imposed on net investment income for taxpayers with taxable income over $200,000-$250,000; as well as interest, dividends, royalties, rents, capital gains, and passive income from a trade or business, or income from the business of trading in commodities or financial instruments. Excluded items include interest on tax-exempt bonds, veterans' benefits, gain on the sale of a principal residence, trade or business income and retirement plan distributions; an increased threshold for claiming medical on Schedule A, from 7.5 percent to 10 percent, but remains at 7.5 percent for those age-65-and-older until 2016; additional Medicare tax on high income workers, increased by 0.9 percent on those earning over $250,000 joint, $250,000 single; does not impact the Medicare tax paid by the employer; and the employer is required to withhold on wages over $200,000.
Frey said other key items are that the IRS standard business mileage rate for 2013 is 56.5 cents per mile; there are Hurricane Sandy 401(k) hardship withdrawals; and Hurricane Sandy charitable deductions are not limited to 50 percent.
A brief question and answer session followed.