By DANA ERICKSON – Gazette Columnist
Death and taxes are the two certain things in life. Proposed tax changes are always in the news, so how do you keep up with all the changes?
With tax season just behind us, it makes sense to revisit some of the changes from 2011 to learn what will be different next year when you file your taxes. A little planning and insight now could make a big difference for you in the future.
Keep in mind also that the "Bush tax cuts" remain in effect, but are scheduled to expire at the end of this year. New Medicare-related taxes are effective in 2013, and are still greatly misunderstood.
Finally, the year is not over, and we may see new legislation that may affect some or all of these provisions. With all that said, here’s a rundown on how things stand today.
Expired in 2011
Qualified charitable distributions: This provision expired at the end of 2011. It allowed individuals at the Required Minimum Distribution Age (70.5 or older) to make direct contributions to qualified charities directly from their IRAs without paying income tax on the distribution. These charitable distributions were excluded from income and counted toward satisfying the annual required minimum distributions from an IRA. Until new rules are passed, contributions to charities from IRAs once again are considered taxable income.
Alternative minimum tax (AMT): The AMT system is an additional federal income tax system with separate rates and rules. The AMT provisions generally apply to higher income individuals. There were changes to the program that expired in 2011, and if no additional legislation is passed, the AMT exemption amounts will be significantly lower, and you won’t be able to offset the AMT with most nonrefundable personal tax credits.
Bonus depreciation and IRC Section 179 expense limits: Small business owners and self-employed individuals were allowed a first-year depreciation deduction of 100 percent of the cost of qualifying property acquired and placed in service during 2011. Changes to this "bonus" depreciation drops to 50 percent for property acquired and placed in service during 2012, and disappears entirely in 2013. For 2011, the maximum amount that you could expense under IRC Section 179 was $500,000; in 2012, the maximum is $139,000; and in 2013, the maximum will be $25,000.
State and local sales tax: If you itemize your deductions, 2011 was the last tax year that state and local general sales taxes could be deducted in lieu of state and local income tax.
Education deductions: The above-the-line deduction for qualified higher education expenses and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals both expired at the end of 2011.
Expiring at the end of 2012
Federal income tax rates: After Dec. 31, 2012, we’re scheduled to go from six federal tax brackets (10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent) to five (15 percent, 28 percent, 31 percent, 36 percent, and 39.6 percent). Note that the low 10 percent tax bracket will no longer exist.
Long-term capital gains rate: Beginning in 2013, the long-term capital gain taxation rate will increase from a maximum of 15 percent to a maximum of 20 percent. Currently, if you fall into the 10 percent or 15 percent marginal income tax bracket, a special 0 percent rate generally applies; however, in 2013 a maximum 10 percent rate will apply to those in the lowest (15 percent) tax bracket (though slightly lower rates might apply to qualifying property held for five or more years). The current lower long-term capital gain rates now apply to qualifying dividends; starting in 2013, dividends will be taxed at ordinary income tax rates.
2 percent payroll tax reduction: The 2 percent reduction in the Social Security portion of the Federal Insurance Contributions Act (FICA) payroll tax expires at the end of 2012.
Itemized deductions and personal exemptions: Beginning in 2013, itemized deductions and personal and dependency exemptions will once again be phased out for individuals with high adjusted gross incomes (AGIs).
Tax credits and deductions: In 2013 the earned income tax credit, the child tax credit, and the American Opportunity (Hope) tax credit will revert to old, lower limits and rules of application. Taxpayers also won’t be able to deduct interest on student loans after the first 60 months of repayment.
Marriage penalty relief: If you’re married and file a joint return with your spouse, you’ll see a reduced 2013 standard deduction amount, as well as lower 2013 tax bracket thresholds in the tax rate tables.
New taxes effective in 2013
The health-care reform legislation in 2010 created two new Medicare-related taxes that will take effect in 2013:
Medicare contribution tax on unearned income: High-income taxpayers will see a new 3.8 percent Medicare contribution tax imposed on their unearned income. Generally, the tax applies to the net investment income of individuals with modified adjusted gross income that exceeds $200,000 ($250,000 for married couples filing jointly, and $125,000 for married individuals filing separately).
Additional Medicare payroll tax: The hospital insurance (HI) portion of the payroll tax – commonly referred to as the Medicare portion – increases by 0.9 percent (from 1.45 percent to 2.35 percent) for those with wages exceeding $200,000 ($250,000 for married couples filing jointly, and $125,000 for married individuals filing separately). The rate for self-employed individuals increases from 2.9 percent to 3.8 percent on any self-employment income that exceeds the dollar thresholds above.
Dana Erickson, ChFC, CASL is a Financial Consultant with Thrivent Financial for Lutherans in Stillwater. She can be reached at 651-439-7091.