Tax questions? Ask our experts (Cliff Note version update of 2012 income tax regulations)

Mary Carr Mayle for the Savannah Morning News writes:   When Congress and the president waited until New Year’s Day to cobble together a “fiscal cliff” deal, it put taxpayers, tax preparers and even the Internal Revenue Service behind the curve.  With some tax regulations changing — but not necessarily the way they were expected to — and others that were expected to change actually staying the same, the IRS had to delay all tax filings until Feb. 1 while it played catch-up, printing new forms and instructions.

To help our readers sort through this latest maze of IRS rates and regulations, the Savannah Morning News and Savannahnow have teamed up with the tax experts at longtime local accounting firm Hancock Askew & Co. this week to take your questions regarding individual or small business returns.

Four of the firm’s tax accountants will help you understand changes in the tax laws and how they might pertain to you, whether you are an individual taxpayer or a business person.

What they can’t do, of course, is offer legally binding answers to questions specific to your circumstances. 

“Because we can’t possibly understand anyone’s complete tax situation in one phone call, we’ll give you our best advice based on what we know about your circumstances and suggestions for seeking additional help if you need it,” said Ann Carroll, director of business development and marketing for Hancock Askew.

To get you started, here is an update of 2012 income tax regulations:

Rates
• The Bush era income tax rates of 10, 15, 25, 28, 33 and 35 percent remain the same, although the thresholds were expanded.
• A new rate of 39.6 percent applies to taxpayers with taxable income over $400,000 ($450,000 for married taxpayers and $425,000 for heads of households).

Capital gains and dividend rates
• The top rate for capital gains and dividends was raised to 20 percent (up from 15 percent) and applies to taxpayers whose income falls in the thresholds set for the 39.6 percent rate (taxable income over $400,000 single, $450,000 married filing joint and $425,000 heads of households).
• The capital gains and dividend rate of 15 percent applies to taxpayers whose income falls between the 25 and 35 percent rate thresholds.
• A zero percent capital gains and dividend rate applies to taxpayers whose income falls below the top of the 15 percent income tax bracket.

Child, dependent care credit
• The 35 percent credit rate has been permanently extended.
• The $3,000 cap on expenses for one qualified individual and $6,000 cap on expenses for two or more qualifying individuals have also been extended.

Education incentives
• The American Opportunity Tax Credit (AOTC) has been extended through 2017.
The AOTC provides 100 percent for the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000 for a total of $2,500 per student.
• The AOTC applies to the first four years of a student’s post-secondary education.
• The above-the-line deduction for qualified tuition and related expenses has been extended
• The exclusion from income and employment taxes of deduction assistance up to $5,250 has been permanently extended.
• In addition to the income exclusion, an employer can also deduct up to $5,250 annually for qualified education expenses paid on behalf of the employee.
• The teacher’s classroom expense deduction allowing a deduction for qualified expenses up to $250 paid out-of-pocket during the year has been extended through 2013.

Mortgage issues
• The provision that excludes cancellation of mortgage debt on a principal residence of up to $2 million from income has been extended through 2013.
• The provision that treats mortgage insurance premiums as deductible qualified residence interest has been extended through 2013.

Alternative Minimum Tax
• The AMT rates remain at 26 and 28 percent.
• A “permanent AMT patch” has been implemented.
• The AMT exemption was retroactively increased for 2012 ($50,600 for single filers; $78,750 for married individuals filing jointly and surviving spouse filers; $39,375 for married individuals filing separately).
• The exemption amounts are slightly higher than 2011.
• Individuals can offset the entire regular tax and AMT liability by nonrefundable personal exemptions retroactive to Jan. 1, 2012. 

Retirement Accounts
• Workers may contribute $17,000 for 2012 ($17,500 for 2013) with an additional $5,500 for individuals over age 50.
• IRA and Roth IRA limits remained at $5,000 for 2012 ($5,500 for 2013) with an additional $1,000 for individuals over age 50.
• Most restrictions have been removed allowing participants in 401(k) plans within-plan Roth conversion features to transfer those funds into a Roth account any time.
• These conversions are taxable events.

Other changes
• The marriage penalty relief has been extended.

• The personal exemption phase out rules have been brought back, however with slightly higher income thresholds than in the past.

• The Pease limitation on itemized deductions is back, however with significantly higher applicable thresholds.

• The threshold for deducting medical expenses increased from 7.5 percent to 10 percent of AGI.

• The $1,000 child tax credit has been permanently extended.

Changes for small businesses
• Code Section 179 small business expensing was extended through 2013 and is retroactive for 2012.

• Businesses may expense up to $500,000 of qualified property with a $2 million investment limit.

• The 50-percent bonus depreciation was extended through 2013.

• The 15-year recovery period for qualified leasehold improvements, qualified retail 
improvements and qualified restaurant property has been extended through 2013.

• Code Section 41 research tax credit has been extended through 2013.

• The Work Opportunity Tax Credit (WOTC) was extended through 2013. WOTC employers who hire “difficult-to-employ” workers are eligible for a credit up to $6,000.

• Many other business tax extenders that expired after 2011 have been extended through 2013 including 10 renewable resource and other energy tax incentives.

What’s new for 2013?
• According to the Patient Protection and Affordable Care Act, effective Jan. 1, there is a new 3.8 percent Medicare surtax on net investment income, which applies to the extent modified adjusted gross income exceeds $200,000 for single filers ($250,000 for married joint filers).
The effective top rate for net capital gains for many “higher income” taxpayers thus becomes 23.8 percent for long term gains and 43.4 percent for short-term capital gains.

• There is an additional 0.9 percent surtax on any wages and self-employment income earned in excess of $200,000 ($250,000 for married filers) with required withholding.

• Beginning in 2013, the thresholds for the phase out of the Alternative Minimum Tax exemption amount are indexed for inflation ($115,400 for single filers; $153,900 for married individuals filing jointly and surviving spouse filers; $76,850 for married individuals filing separately).