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Focus on Professional Services: Implications of the New Tax Law

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As a service to RubinBrown’s professional services clients, we have summarized the prominent provisions of the new tax law that are most applicable to your businesses.
January 17, 2013

As a service to RubinBrown’s professional services clients, we have summarized the prominent provisions of the new tax law that are most applicable to your businesses.

INDIVIDUALS

Income Tax Rates
  • For tax years beginning after December 31, 2012, income tax rates will remain at 10%, 15%, 25%, 28%, 33% and 35%
  • An additional 39.6% rate will apply for taxable income above certain thresholds
    • The thresholds are $450,000 for married filing jointly and surviving spouse filers, $425,000 for head of household filers, $400,000 for single filers and $225,000 for married filing separately filers
    • These thresholds will be adjusted for inflation after 2013

Capital Gain and Dividend Tax Rates

  • For tax years beginning after December 31, 2012, the top rate for long-term capital gains and qualified dividends will rise to 20% (up from 15%) before the surtax described below for taxpayers with taxable income above certain thresholds
    • The thresholds are $450,000 for married filing jointly and surviving spouse filers, $425,000 for head of household filers, $400,000 for single filers and $225,000 for married filing separately filers
    • These thresholds will be adjusted for inflation after 2013
  • It should be noted that the 3.8% surtax on net investment income introduced by the Patient Protection and Affordable Care Act still applies to net investment income for certain taxpayers
  • The top rate for long-term capital gains and qualified dividends will be 23.8% when the surtax is included
  • Short-term capital gains will continue to be taxed at the taxpayer’s ordinary income tax rate

Limitation on Itemized Deductions

  • For tax years beginning after December 31, 2012, itemized deductions will be limited for taxpayers with adjusted gross income (AGI) above certain thresholds
    • The thresholds are $300,000 for married filing jointly and surviving spouse filers, $275,000 for head of household filers, $250,000 for single filers and $150,000 for married filing separately filers
    • These thresholds will be adjusted for inflation after 2013
  • For taxpayers subject to this “Pease” limitation, the total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer’s AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions

Alternative Minimum Tax (AMT)

  • The Act provides permanent AMT relief
  • The Act changes the amounts of the AMT exemption
    • The AMT exemption amounts for 2012 have retroactively been increased to $78,750 for married filing jointly and surviving spouse filers, $50,600 for single and head of household filers and $39,375 for married filing separately filers
    • These exemption amounts will be adjusted for inflation after 2012
  • In addition, the Act permanently allows a taxpayer to offset their entire regular tax liability and AMT liability by the total of their nonrefundable personal credits

Payroll Tax Cut Not Extended

  • The temporary reduction in the employee portion of the FICA rate expired December 31, 2012 and was not extended
  • The rate for the employee share of FICA will revert to 6.2% (up from 4.2%) on wages up to $113,700 in 2013
  • The rate for the FICA portion of self-employment income will revert to 12.4% (up from 10.4%) on self employment income up to $113,700 in 2013

Pension Provision

  • For transfers after December 31, 2012, in tax years ending after that date, plan provisions in an applicable retirement plan (including qualified Roth contribution programs) can allow participants to elect to transfer amounts to designated Roth accounts with the transfer being treated as a taxable qualified rollover contribution.

ESTATE & GIFT TAXES

For individuals dying and gifts made after 2012

  • Exemption level permanently set at $5,000,000 (to be indexed for inflation after 2011)
  • Top tax rate increases from 35% to 40%
  • Continues portability feature that allows the estate of the first spouse to die to transfer his or her unused exemption to the surviving spouse

BUSINESSES

Depreciation Provisions

  • 50% bonus depreciation is applicable for new property placed in service after December 31, 2012 and before January 1, 2014
  • 15-year straight line cost recovery for qualified leasehold improvements has been extended through 2013
  • Increased Code Section 179 expensing limitations ($500,000 with a $2,000,000 investment limit) has been extended through 2013

     

    Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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