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TAX PLANNING FOR SOCIAL SECURITY RECIPIENTS

        The American Taxpayer Relief Act of 2012        

The American Taxpayer Relief Act (Act) has permanently extended the reduced tax rates of 10, 25, 28 and 33 percent that were a result of the Economic Growth and Tax Relief Reconciliation Act of 2001. The top tax rate of 35 percent has been made permanent for taxable incomes up to $400,000 on a single filing, $425,000 for head of household and $450,000 for a joint return.

 

The tax rate on incomes above those threshold amounts will return to the 39.6 percent rate in effect prior to the 2001 Act. All taxable income threshold amounts will be indexed for inflation after 2013.

 All taxable income threshold amounts will be indexed for inflation after 2013.


Itemized Deduction Personal Exemption Limits

The Act is reinstating and making permanent the personal exemption phase-out and the itemized deduction limitations under pre-2001 law. The personal exemption of $3,900 (for 2013) will be reduced by 2 percent for each $2,500 (or fraction thereof) that the taxpayer's adjust gross income (AGI) exceeds $250,000 for a single filer, $275,000 for a head of household or $300,000 for a joint return.

Those same income thresholds will apply to an itemzied deduction limit which reduces the value of certain itemized deductions by 3 percent of the amount by which AGI exceeds the income threshold. This limitation does not apply to medical expenses, investment interest or casualty and theft losses. The income thresholds will be indexed for inflation after 2013.

Child Tax Credit

The current child tax credit of $1,000 per eligible child has been made permanent but will not be indexed for inflation. The additional child tax credit which provides for the credit to be refundable up to 15 percent of earned income in excess of a certain amount has also been made permanent. The credit will also be permanently allowable regardless of a taxpayer's alternative minimum tax (AMT).

Marriage Penalty

The standard deduction for married couples ($12,200 in 2013) has been set permanently to twice the value of single individuals and the width of the 15 percent tax bracket for joint returns has been permanently set to twice the width of single returns.

Education

The exclusion from taxable income of employer-provided educational assistance for both undergraduate and graduate-level courses has been extended under the Act.

The expansion of the deduction for student loan interest that was enacted in 2001 has been made permanent and the income at which the deduction begins to phase out has been raised to $60,000 for single individuals and $125,000 for joint returns. The Act permanently allows the deduction of voluntary interest payments and repeals the 60 month limit during which interest paid can be deducted.

Dependent Care

The maximum credit rate for the child and dependent care tax credit has been permanently extended from 30 to 35 percent. The Act also permanently extends the maximum eligible expenses from the previous $2,400 to $3,000 ($4,800 to $6,000 for two or more eligible children) and the increase in the credit phase-out from $10,000 to $15,000 of AGI.

Adoption Credit

The expansion of the adoption credit enacted in 2001 has been permanently extended and the credit is allowed regardless of AMT. The expense limit and exclusion from taxable income of employer-provided adoption assistance is increased to ($12,770 in 2013) for special needs and non-special needs children and the credit and exclusion are available for special needs children regardless of the actual expense.

The increase in the income phase-out starting point has been permanently extended and indexed for inflation which produces a starting phase-out of $191,530 for 2013. The Act did not extend the refundability of the adoption credit as first enacted by the Affordable Care Act.

Estate and Gift Tax

The estate tax provisions of the 2001 and 2010 Acts have been permanently extended. The unified exemption for estate and gift tax purposes ($5.25 million in 2013) has been extended and indexed for inflation but the tax rate has been raised from 35 percent to 40 percent. The portability of the exemption between spouses which allows a decedent to elect to permit the surviving spouse to claim any unused exemption is now permanent.

Capital Gains

The 2001 decrease in the tax rate on long-term capital gains from 20 percent to 15 percent for taxpayers not in the 39.6 percent tax bracket and from 10 percent to 0 for taxpayers in the bottom two tax brackets has been made permanent.

For taxpayers in the 39.6 percent tax bracket, the long-term capital gains tax will revert back to the pre-2001 rate of 20 percent. The Act also makes permanent the repeal of the 18 percent rate on gains from the sale of assets held for five or more years.

Qualified Dividends

The Act permanently extends the preferential tax treatment of qualified dividends under the 2001 Act which taxes qualified dividends under the same rate structure as long-term capital gains.

Tax Provisions Extended

Several individual, business, and energy tax provisions that expired at the end of 2011 or 2012 were extended through 2013. The most significant extensions in each group are described below.

Individual

● Above-the-line deduction of up to $250 for teacher classroom expenses.

● The exclusion from gross income for mortgage debt that is discharged (forgiven) by the lender.

● Tax benefits for employer-provided mass transit.

● Allowance of an itemized deduction for mortgage premium insurance.

● The itemized deduction for state and local general sales taxes, in lieu of a deduction for state and local income taxes.

● The above-the-line deduction for qualified tuition and related expenses.

● Tax-free distributions for charitable contributions from IRAs by individuals who are at least 70 years old.

Business

● The credit for research and experimentation expenses.

● The new markets tax credit ($3.5 billion allocation in 2012 and 2013).

● The 50 percent credit for expenditures to maintain railroad tracks.

● The work opportunity tax credit (WOTC), including eligibility of recently discharged veterans.

● Qualified zone academy bonds ($400 million allocation in 2012 and in 2013).

● Accelerated depreciation for leasehold, restaurant, and retail improvements.

● Accelerated depreciation for business property on Indian reservations.

● Enhanced charitable deduction for contributions of food inventory.

● An increase in the section 179 expensing amount limit to $500,000 and the investment threshold for reducing the amount expensed to $2 million.

● Special expensing rules for certain film and television productions.

● Deduction for domestic production activity income in Puerto Rico.

● The exception for active financing income under subpart F.

● Favorable treatment of certain payments between related controlled foreign corporations.

● Special rules for qualified small business stock.

● Special rule for S corporations.

● Empowerment zone tax incentives.

● 50 percent bonus depreciation.


Energy

● Credit for nonbusiness energy property.

● Credits for biofuel and biodiesel.

● Credit for renewable electricity production.

● Credit for energy-efficient appliances.

● Excise tax credits for alternative fuels.

 

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