The American Taxpayer Relief Act - How It Applies To Individuals & How It Applies To Businesses

Dave Erb and Karen Baksa for BerryDunn write: On January 2, President Obama signed the "American Taxpayer Relief Act of 2012" (ATRA) into law.  The law averted the so-called "Fiscal Cliff" and prevented the expiration of many of the tax provisions put in place during the Bush administration. Here is a summary of some of the changes included in the new tax law that may affect you:

INDIVIDUALS

• Income tax rates for most individuals will remain unchanged. However, a 39.6% rate will apply to high-income taxpayers with income above a threshold of $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married taxpayers filing separately. 
• Tax on capital gains and dividends has changed for years beginning after 2012. The tax rate will be 20% for taxpayers with income above the thresholds defined above and will be 15% for others (0% for taxpayers in tax brackets below 25%.) In addition, the 3.8% investment surtax will apply to individuals with modified adjusted gross income (MAGI) in excess of $250,000 for joint filers ($200,000 for single and head of household). Note that the threshold triggering the 3.8% remains the same as it did before January 1—and it is lower than the income tax rate thresholds mentioned above.
• Marriage penalty relief has been reinstated. The size of the 15% tax bracket for joint filers and qualified surviving spouses remains at 200% of the 15% tax bracket for individual filers.
• Personal exemptions did not phase out, except for higher-income taxpayers. The starting threshold for phase-out is $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married taxpayers filing separately.
• The "Pease" limitation on itemized deductions has been reinstated for 2013. Certain itemized deductions are reduced by 3% of the amount by which the taxpayer's adjusted gross income exceeds the same thresholds used for the personal exemption phase-out.
• The Alternative Minimum Tax relief has been extended and made permanent. The AMT exemption amounts have been increased and will be indexed for inflation.
• For estates of decedents dying after December 31, 2012, the maximum federal estate tax rate increases to 40% with a $5 million exclusion that will be adjusted annually for inflation. "Portability" between spouses has been made permanent.
• The exclusion for discharged home mortgage debt has been extended for one year through 2013.
• The treatment of mortgage insurance premiums as deductible qualified residence interest has been reinstated and extended through 2013.
• The state and local sales tax deduction has been reinstated and extended through 2013. This deduction is in lieu of state and local income taxes.
• The American Opportunity Tax Credit for qualified tuition and related expenses has been extended for five years.
• The above-the-line deduction for higher education expenses has been reinstated and extended so it can be claimed for tax years beginning before Janurary 1, 2014. 
• The provision to allow nontaxable IRA transfers up to $100,000 to eligible charities has been reinstated and extended for two years so that it's available for charitable IRA transfers made in tax years beginning before January 1, 2014. Two tax elections are available to allow the retroactive application of this provision to 2012; however, you must act before the end of January 2013.

BUSINESSES

On January 2, President Obama signed the "American Taxpayer Relief Act of 2012" (ATRA) into law. The law averted the so-called "Fiscal Cliff" and prevented the expiration of many of the tax provisions put in place during the Bush administration. Here is a summary of some of the changes included in the new tax law that may apply to your business:

• Bonus first-year depreciation has been extended for one year. The new law extends the 50% first-year bonus depreciation allowable for qualified property placed in service before January 1, 2014. In addition, the rules treating qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property as 15-year property have also been extended through 2013.
• Section 179 expensing amounts have been increased for 2012 and 2013 to $500,000. The cap on eligible purchases has been increased to $2,000,000. An extension has been granted to allow up to $250,000 of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property, to be eligible for expensing under code Section 179.
• The allowable increase in first-year deprecation for autos and trucks of $8,000 has been extended through 2013.
• The Work Opportunity Tax Credit has been extended through 2013.
• The Research Credit has been reinstated for 2012 and has been extended so that it applies for amounts paid or accrued before January 1, 2014.
• Permanently extends the exclusion from income and employment taxes of employer-provided education assistance up to $5,250.
• The exclusion of 100% of gain from the disposition of qualified small business stock has been extended to include qualified stock acquired after September 27, 2010 and before January 1, 2014. 

What's New For Tax Year 2012 (When Filing In 2013)

Steven Packer, CPA with Duane Morris writes: Individuals: 

Personal Exemptions: The personal exemption is $3,800 for 2012, an increase of $100.

Alternative Minimum Tax (AMT): Exemption increased to $50,600 (from $48,450) for single taxpayers, $78,750 (from $74,450) for joint filers and $39,375 (from $37,225) if married and filing separately. These increases are now permanent and will be indexed for inflation for tax years beginning after 2012. Also, for tax years beginning after 2012, certain non-refundable personal credits are permitted to offset the entire regular and AMT tax liability.

Refundable Child Credit: For 2012, any unused credit is refundable in an amount equal to the lessor of the unclaimed portion of the non-refundable credit, or 15 percent of the taxpayer's earned income in excess of $3,000. Special rules apply for taxpayers with three or more children.

Standard Mileage Rates: The standard mileage rate is 55.5 cents per mile for business use of car, 23 cents per mile for medical and moving purposes and 14 cents per mile for charitable purposes.

Roth IRA Conversions: Regardless of income, individuals may convert funds from retirement accounts, such as 401(k) or IRA accounts, to Roth IRAs. If such a conversion was made in 2010, and the election was made to defer the tax on the taxable amount, the remaining tax is due in 2012. Tax deferrals for Roth IRA conversions are no longer permitted.

IRA Contribution AGI Limits Increased: If you were covered by a retirement plan through your employer in 2012, your deduction for contributions to traditional IRAs is phased out starting at $58,000 of AGI for single taxpayers and $92,000 of AGI for joint filers.

American Opportunity Tax Education Credit Continues: Up to $2,500 credit per student for qualified higher-education expenses, such as tuition and cost of books. Phase-out begins at AGI of $80,000 for single filers and $160,000 for joint filers.

Retirement Savings Plans Continue: IRA deductions may be available for those covered by other plans subject to certain dollar limits and phased out for single and joint taxpayers with AGI between $58,000 to $68,000 and $92,000 and $112,000, respectively. For joint filers where only one spouse is covered by another plan, the phase-out range is $173,000 to $183,000.

Roth IRA Income Limits: Roth contributions may be allowed for those with AGI of less than $125,000 for single taxpayers and $183,000 for joint filers.

Tax Benefits for Adoption: Maximum adoption credit is $12,650 for 2012 (down from $13,360) for out-of-pocket expenses for the legal adoption of a child. The credit is no longer refundable.

Businesses

Domestic Production Activities Deduction: The provision is no longer available for production activities in Puerto Rico.

Empowerment Zone Employment Credit: This credit is no longer available for tax years ending after 2011.

Work Opportunity Tax Credit: For employees hired in 2012, the credit is available only for wages paid to qualified veterans. Previously, the credit was available for wages paid to employees in several targeted groups.

Bonus Depreciation: Property placed in service in 2012 will qualify for regular bonus depreciation, in which 50 percent of the cost is deductible in the year it is placed in service and the rest is depreciated using normal rules. The provision allowing 100-percent bonus depreciation that was available for property placed in service after September 8, 2010, and before the end of 2011 has expired.

Section 179: Businesses can expense up to $560,000 under Section 179 (previously $500,000), for tax years beginning in 2012, with phase-out beginning when property placed in service exceeds $2 million. Also, for 2012 only, a Section 179 election can be irrevocably revoked without IRS consent. Off-the-shelf software qualifies for the election through 2012.

Research Credit: This credit is no longer available for tax years ending after 2011.

Wealth Transfer Tax Planning for 2013 and Beyond

(Serious Stuff from The Social Science Research Network: a 52 page PDF, Summary Below, Click Here to Read)

Wealth Transfer Tax Planning for 2013 and Beyond

John A. Miller 

University of Idaho College of Law

Jeffrey A. Maine 

University of Maine School of Law
February 9, 2013

Abstract:      
On January 1, 2013 Congress avoided the tax part of the so called “fiscal cliff” when it passed the American Taxpayer Relief Act of 2012 (ATRA). Among its many impacts this law prevented the application of a number of sunset provisions that would have dramatically altered the operation of the federal wealth transfer taxes. Instead Congress made permanent two significant transfer tax provisions introduced as temporary measures in 2010: the indexed basic exclusion amount and the deceased spousal unused exclusion amount. The latter provisions are sometimes referred to as the portability rules. ATRA also introduced a new maximum transfer tax rate of 40%. In addition ATRA made permanent a deduction for state death taxes and prevented the return of the state death tax credit. Thus, the main transfer tax emphasis of the actions taken by Congress in ATRA was to stabilize the wealth transfer tax system in a fashion that eliminates or reduces its planning impact on most taxpayers while also permanently establishing a significant new planning tool for the wealthy, the deceased spousal unused exclusion (DSUE) amount.

In this article we summarize the operation of the federal wealth transfer taxes in the wake of ATRA and describe the basic tax planning techniques for wealth transmission. In doing so, we offer a thorough analysis of the operation of the portability rules and discuss their planning virtues and drawbacks. The overall design of this article is to bring the general practitioner into the current wealth transfer tax planning picture while providing references to more detailed treatments of particular topics within this broad field.

Click Here to Read

GoodApril : Online tax planning solution for individual American taxpayers is looking for investors

This is kind of interesting.....Looking to invest in a start up Online Tax Planning company?   I came across "GoodApril" on a venture capital fund raising website where Start-Ups Meet Investors called "Angel List" (Angel Investors). GoodApril helps consumers prepare for and pay less in taxes.  Unlike TurboTax, H&R Block, GoodApril provides in-year tax guidance to everyday American taxpayers.  GoodApril’s first product is a “Tax Checkup” that provides consumers with an analysis of their tax situation, measures how much they are likely to owe in the coming year as a result of new tax rules, and identifies potential tax savings opportunities.    Click this link here to check it out!  On their site they say, "GoodApril’s mission is to eliminate the pain of tax filing for Americans. We are giving everyday Americans access to the kind of tax-saving tools and expertise that the wealthy receive from their wealth planners and CPAs."    Whoa!   ExactCPA is founded by a CPA that worked in the Family Office High Net Worth space for Rockefeller & Co. for 7 years.  Rockerfeller & Co. is the very founding cornerstone of the "High Net Worth/Family Office" investment firm.    I say that to say we know "the kind of tax-saving tools and expertise that the wealthy receive from their wealth planners & CPAs" (to quote GoodApril).   I'm sorry, it's not what GoodApril does, what the wealthy receive is direct and personal client service in conversation on the phone or in person with highly credentialed expert advisers at an on-demand basis.    I just wanted to set the record straight on a bit of the hype coming from "GoodApril".    High Net Worth/Family Office clients are not served via software, online apps, or even email.   I get what GoodApril is aiming at though and we wish them good luck, want to bring them some attention and that's why we are profiling them here and now.  We do a lot of consulting to small business here and if I would have to guess.....I'm thinking "GoodApril" is trying to position themselves to be bought by Intuit or H&R Block.  

Tax Efficiency: Asset Class And Process Trump Vehicle Type ( ETFs can be more tax-efficient than active mutual funds but are not necessarily more tax-efficient than well-run index mutual funds)

Michael Rawson, CFA writes: With so much uncertainty in financial markets, there are few outcomes over which investors have much control. One area in which informed decision-making can consistently pay off is with regard to tax planning. Investors in high tax brackets or with a lot of money to invest should consider which asset classes and which strategies are best held in a taxable account and which are best held in a tax-deferred account. Passive strategies generally are more tax-efficient, but this is not always the case, particularly if an index fund invests in an asset class with high tax costs or tracks an index with high turnover.

Asset Class Tax Treatment Trumps All Else
Certain asset classes offer better aftertax returns in tax-deferred accounts, such as assets that throw off a large share of their total return in the form of interest income, which is taxed at ordinary income tax rates. For example, if an investor in the highest tax bracket were to hold iShares Core Total U.S. Bond Market ETF (AGG) in a tax-deferred account, they would have earned a 5.78% annualized return for the five years ended Dec. 31. That same investment held in a taxable account would have returned only 4.43% for an investor in the highest tax bracket. When choosing a fund for a taxable account, one would have been better off with the iShares National AMT-Free Muni Bond ETF (MUB) which returned 5.48%. But in the tax-deferred account, the muni fund underperformed the taxable iShares Total U.S. Bond Market fund.

Investments that generate nonqualified dividends, such as REITs, are also better held in tax-sheltered accounts because those dividends are taxed at investors' ordinary income tax rates. For example, T. Rowe Price Real Estate's (TRREX) 10-year annualized return of 12.53% drops to 10.99% for an investor in the highest tax bracket, once taxes are factored in.

Qualified dividend income, on the other hand, is somewhat tax-advantaged compared with ordinary income. For 2013, the highest ordinary income tax rate is 43.4% when including the 3.8% Medicare tax surcharge on high earners, while the highest tax rate is 23.8% on qualified dividends. Over the long term, dividend-paying stocks have performed well, so risk-tolerant investors with additional money to invest can hold dividend-focused funds in taxable accounts, despite the slight tax disadvantage compared with holding them in a tax-deferred account. Naturally, you would put dividend-paying funds in a tax-deferred account first, but those with large taxable accounts should not necessarily avoid dividend-paying stocks. It is important to remember that it is the total aftertax return that is most important, not necessarily minimizing taxes. For example, while it is true that during the past five years, an investor in Vanguard Dividend Growth (VDIGX) paid more in taxes than an investor in a typical S&P 500 Index fund, VDIGX still had a much higher aftertax return.

Strategies Still Play a Role
Although the decision about which asset classes to hold in which account types are a crucial component of tax management, investors can also help improve their aftertax results by focusing on tax-efficient strategies for their taxable holdings. Exchange-traded funds are often touted as tax-efficient investments because they can gain an edge through the use of an additional tax-fighting weapon at their disposal: the creation and redemption process. Rather than selling stock to meet investor redemptions, ETFs are redeemed through an in-kind transfer with an authorized participant. The in-kind, or shares for shares, transfer allows for the elimination of low-cost-basis shares, thus reducing (but not eliminating) the possibility of future capital gains distributions.

But here is the rub: This in-kind creation and redemption mechanism works best for U.S.-stock funds. Once we venture outside of the U.S.-stock asset class, the tax benefits stemming from the in-kind creation and redemption process might diminish somewhat. In addition, investors will owe taxes on the distributions of dividends or interest income that the fund receives and will face capital gains taxes when selling the fund, regardless if the fund is an ETF or index mutual fund. ETF tax efficiency only relates to the likelihood that the fund itself will incur and distribute capital gains to its shareholders.

And even for U.S.-equity ETFs, most of their tax efficiency stems from the fact that they are index funds, which typically have low turnover and thus generate fewer capital gains than actively managed funds. There are plenty of ETFs (and conventional index funds, for that matter), that follow higher-turnover, so-called strategy indexes, which might be less tax-efficient than traditional, market-cap-weighted index mutual funds. For example, the PowerShares Fundamental Pure Large Core (PXLC) had a five-year tax-cost ratio of 0.63, high by equity ETF standards, likely because of the fact that the fund has high turnover.

In addition, a handful of tax-managed mutual funds--traditional open-end funds that hew closely to market benchmarks but have active oversight--have achieved tax efficiency by following best practices, such as limiting trading, keeping track of tax lots, and appropriately timing the sale of high-cost-basis shares. In summary, tax efficiency comes from diligent implementation of a sound low-turnover strategy, not necessarily from some magical tax loophole afforded only to ETFs.

Delving Into the Details
Let's look at some specific examples to illustrate the point that ETFs can be more tax-efficient than active mutual funds but are not necessarily more tax-efficient than well-run index mutual funds.

The iShares Core S&P 500 ETF ( IVV) had a 10-year pretax annualized return of 7.03% and a post-tax (but preliquidation) return of 6.71%. This results in a tax-cost ratio of 0.30. The tax-cost ratio measures the amount of return lost to taxes, so a lower number in combination with a higher after return is better. A similar ETF,
SPDR S&P 500 (SPY) had a 6.99% pretax return and 6.65% post-tax return, for a tax-cost ratio of 0.32. The average tax-cost ratio for actively managed large-blend funds during the past decade has been 0.60, so these two ETFs have been much more tax-efficient.

But a number of index mutual funds and tax-managed funds have also been tax-efficient. The institutional share class of Vanguard Institutional Index (VINIX) had a pretax return of 7.11% and 6.78% post-tax, for a tax-cost ratio of 0.31. The Vanguard index mutual fund was equally tax-efficient as the two ETFs. Yet not all index mutual funds are as well-run as Vanguard's. T. Rowe Price Equity Index 500 (PREIX) had pretax and aftertax returns of 6.83% and 6.11%, resulting in a tax-cost ratio of 0.67%.

Data sourced from iShares, PowerShares, T. Rowe Price, Vanguard, and Morningstar. Tax-cost ratio data reflect five- and 10-year periods ended Dec. 31, 2012.

Tax Alert: A Business Friendly Change - New Jersey Alternative Business Calculation Adjustment

Wilken & Guttenplan write: For a number of years, New Jersey's Individual Gross Income Tax (GIT) has frustrated business owners due to the limitations it imposes on deducting losses. GIT created a "bucket" approach to taxing different types of income where losses can only be used to offset income in the same category. There are four different categories of income that can be generated by business owners:

• Income/loss from sole proprietorships
• Rentals and royalties
• Partnerships, and
• S corporations

Income earned from one category of business could not be offset by losses from another. This can result in a business owner paying tax even though they incur an economic loss for the year. For example, a taxpayer with $100,000 of income from an S corporation and a $100,000 loss from a partnership would be subject to tax on $100,000 even though they did not have any net business income. Additionally, net losses in any category were lost as New Jersey did not allow for any net losses to be carried forward.

Effective for taxable years beginning on or after January 1, 2012, New Jersey has created the "Alternative Business Calculation Adjustment" ("ABCA") which will help mitigate this situation for business owners. The ABCA will allow for a limited netting of gains from one category of gross income with losses from another category. For 2012, 10% of net losses from any category can be used to offset business income from another category limited to10% of income. This loss netting percentage will be increased by 10% each year through 2016 when it will be fully phased in at 50%.

This law change has also created a carryover concept for business losses in New Jersey. If an overall business loss is incurred for any year after netting all four categories of income, the net loss can be carried forward to offset future losses. The loss can be carried forward for a maximum of 20 years.

Using the example above, the taxpayer would now be subject to tax on $90,000 of income for 2012 ($100,000 of S corporation income less 10% of the $100,000 partnership loss). There would still be no carryover loss allowed in this scenario since an overall business loss has not been incurred. Had the partnership loss been $115,000, the taxable income would continue to be $90,000 ($100,000 of S corporation income less 10% of the $115,000 partnership loss, capped at $10,000) but a carryover loss of $15,000 would now be allowed for the net overall business loss incurred.

While this provision is a welcome development for business owners, it is important to note that even when fully implemented in 2016, the benefit of this rule will only allow a partial offset of income and losses between the four GIT categories. It is still better to try to structure business holdings so that they are in the same category to the extent possible to preserve the ability to fully offset income and losses from different businesses.