Search
Certified Public Accountants
& Business Consultants

Focus on Taxation: What Will Change If Congress Doesn't Act

Contact Our Team

U.S. tax law will significantly change for both individuals and businesses as many tax provisions either expired at the end of 2011 or will expire at the end of 2012.

Unless new legislation is passed, the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003, other than those made permanent or extended by subsequent legislation, sunset and won’t apply to tax years 2012, as well as subsequent years.
October 23, 2012

U.S. tax law will significantly change for both individuals and businesses as many tax provisions either expired at the end of 2011 or will expire at the end of 2012.   

Unless new legislation is passed, the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003, other than those made permanent or extended by subsequent legislation, sunset and won’t apply to tax years 2012, as well as subsequent years.  

In addition, the health care law (Patient Protection and Affordable Care Act) introduces a surtax on net investment income for certain taxpayers.  

The summary below has been prepared by RubinBrown tax executives to highlight many of the changes to individuals and businesses.

INDIVIDUALS

Changes for 2012

  • Alternative Minimum Tax (AMT)

    • The AMT exemption amounts for 2012 fall t

      • $45,000 (from $74,450 in 2011) for married individuals filing jointly and surviving spouses,

      • $33,750 (from $48,450 in 2011) for unmarried individuals, and

      • $22,500 (from $37,225 in 2011) for married individuals filing separately.  

    • Non-refundable personal credits can no longer be used to offset the AMT.

    • It is estimated that 30+ million (20%) of all taxpayers will be hit by the AMT in 2012 unless Congress acts, according to a recent Congressional Research Service report.

  • Expired Tax Deductions

    • The election to deduct as an itemized deduction state and local general sales taxes in lieu of a state and local income tax deduction.

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

    • Mortgage insurance premiums as qualified residence interest.

    • The up to $250 above-the-line deduction for certain expenses of elementary and secondary school teachers.

  • Other Expired or Modified Provisions

    • The exclusion of 100% of gain on certain small business stock is reduced to 50% of gain, 60% for qualified business entity stock.

    • Tax-free distributions up to $100,000 annually for taxpayers age 70 1/2 and older from individual retirement plans for charitable purposes..

    • Special rules to encourage contributions of capital gain real property for conservation purposes.

    • The nonbusiness energy property credit.

Changes for Post-2012 Years

  • Income Tax Rates
    • The income tax rates for individuals will go from 10%, 15%, 25%, 28%, 33% and 35% to 15%, 28%, 31%, 36% and 39.6%.
    • The size of the 15% tax bracket for joint filers and qualified surviving spouses will go to 167% (rather than 200%) of the 15% tax bracket for individual filers.
  • Capital Gains and Qualified Dividends
    • Long-term capital gain will be taxed at a maximum rate of 20%.  In 2011, the maximum rate was 15%.
    • Dividends (including “qualified” dividends) will be taxed at the same rates that apply to ordinary income.
  • Deductions and Exemptions
    • The standard deduction for married taxpayers filing jointly (and qualified surviving spouses) will go to 167% (rather than 200%) of the standard deduction for single taxpayers.  This will impact those who must file individual income tax returns.
    • Most itemized deductions of higher-income taxpayers will be reduced by 3% of adjusted gross income (AGI) above an inflation-adjusted figure.  The reduction cannot exceed 80% of total itemized deductions.  This has been referred to as the Pease limitation.
    • The above-the-line student loan interest deduction will change to phase out over lower modified AGI ranges and will apply only to interest paid during the first 60 months in which interest payments are required.A personal exemption phaseout (PEP) will apply when AGI exceeds an inflation-adjusted threshold.
  • Tax Credits to Expire
    • The American Opportunity Tax Credit.
    • The refundable credit for unused AMT credit.
  • Other Provisions to Expire or be Modified
    • The cost of employer-provided educational assistance will be excluded from the income of the employee only if it qualifies as a working condition fringe benefit.
    • The parent’s election to include their child’s income on parent’s return will change to include child’s gross income in excess of an inflation-indexed figure, plus 15% (rather than 10%) of the lesser of (a) the inflation-adjusted standard deduction for the dependent child or (b) the excess of the child’s gross income over the amount in (a).
    • Creditable household and dependent care expenses will drop from $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals to $2,400 and $4,800, respectively.  The maximum credit percentage will drop from 35% to 30%, and the AGI-based percentage reduction will begin at $10,000 rather than $15,000.
    • The maximum child credit will drop from $1,000 to $500 and the credit will not be allowed against AMT.  More restrictive rules will apply to the refundable child credit.
    • A number of changes apply to Coverdell Education Saving Accounts.

Changes with the Patient Protection and Affordable Care Act for Post-2012 Years

  • A 3.8% surtax (Medicare contribution tax) applies to the lesser of:
    • Net investment income OR 
    • The excess of modified adjusted gross income over the applicable threshold amount.
  • Net investment income equals the excess of gross income from:
    • Interest, dividends, annuities, royalties, rents, a trade or business engaged in a passive activity or trading business, and net taxable gain attributable to the disposition of property held by a trade or business engaged in a passive activity or trading business, over
    • Allowable deductions that are properly allocable to that gross income or net gain.
  • Net investment income does not include amounts subject to self-employment tax or distributions from retirement plans.
  • The threshold amounts are $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately and $200,000 in any other case.
    For an estate or trust the surtax applies to the lesser of:
    • Undistributed net investment income OR
    • The excess of adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.

ESTATE, GIFT & GENERATION SKIPPING TRANSFER TAXES

Changes for Post-2012 Years

  • A unified estate and gift tax exemption of $1 million (plus inflation adjustment), down from $5,120,000.
  • The estate tax top rate increases from 35% to 55%.
  • A 5% surtax on the wealthiest of estates phases out the benefit of graduated tax rates.
  • A deduction for family-owned businesses will be reinstated.
  • A credit will be available against state death taxes.
  • The executor of a deceased spouse's estate may no longer transfer any unused exemption to the surviving spouse.
  • The generation skipping transfer tax is reinstated with a top rate of 55% and the exemption amount is set at $1 million (plus inflation adjustment).
  • The gift tax top rate increases from 35% to 55%.

BUSINESSES

Changes for 2012

  • Capital Expenditures
    • 15-year write-off for specialized realty assets, including leasehold improvement property, qualified restaurant property and qualified retail improvement property is not available.  A 39-year write-off now generally applies.
    • The 100% bonus first-year depreciation allowance for qualified property was reduced to 50% in 2012.
    • The $500,000 expensing election under Code Section 179, with a $2 million investment ceiling is greatly reduced.  In 2012 the maximum amount that can be expensed is $139,000 with an investment ceiling of $560,000.
  • Expired Tax Credits
    • The research credit.
    • The work opportunity tax credit, except for certain qualifying veterans.
    • The credit for construction of new energy efficient homes.
    • The energy efficient appliance credit.
  • Other Expired or Modified Provisions
    • Enhanced charitable deductions for contributions of food inventory, book inventories to public schools and corporate contributions of computer equipment for educational purposes.
    • Empowerment Zone tax breaks.
    • The exclusion from a tax-exempt organization’s unrelated business taxable income of interest, rent, royalties and annuities paid to it from a controlled entity.
    • The election to expense environmental remediation costs.
    • Lower shareholder basis adjustments for charitable contributions by S corporations.
    • Reduced S corporation recognition period for built-in gains tax.
    • The exception under subpart F for certain income from the active conduct of a banking, financing, insurance or similar business.
    • Look-thru treatment for payments between related controlled foreign corporations under the foreign personal holding company rules.
    • Puerto Rico is no longer included in the definition of “within the U.S.” for purposes of determining domestic production gross receipts.

Changes for Post-2012 Years

  • Capital Expenditures
    • 50% bonus first-year depreciation allowance for qualified property will not be available.
    • The $139,000 expensing election under Code Section 179, with a $560,000 million investment ceiling will decrease to a $25,000 expensing amount, with an investment ceiling of $200,000.
  • Tax Credits to Expire
    • The work opportunity tax credit for qualifying veterans.
  • Payroll Tax
    • The temporary 2% payroll tax cut will no longer apply.
    • The OASDI tax rates for employees will revert to 6.2% from 4.2%.
    • The OASDI tax rate for the self-employed will revert to 12.4% from 10.4%.

RubinBrown is committed to keeping our clients informed of all legislative changes as they occur. Look for frequent updates as we move through the remainder of 2012 and into 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.

All Tax Consulting News Tax Consulting Services

For more information, please contact: