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Tax Law Changes and Highlights 2012-2013

The tax code is constantly being revised, updated and changed.  To help you understand what’s in store for 2012-2013, we have listed some of the recent tax law changes and highlights for 2012-2013:

Federal Tax Law Changes

Casualty Losses: If you have had a loss due to Superstorm Sandy (or any other casualty event,) you are required to report it on your tax return. The rules for documenting your loss are rigorous. For instance, to document Fair Market Value before and after the loss, you will need an appraisal by a qualified appraiser, and to document your adjusted basis on real estate, you will need your closing statement, receipts for capital improvements and past year tax returns to substantiate depreciation taken. To document basis for personal property you will also need receipts. Once you have determined your loss, it will be modified by any insurance proceeds you may have or will receive, emergency grants, gifts from family or friends specifically designated for the storm recovery. Please be aware that if the reimbursements you received exceed the amount of your loss, you may have a taxable gain that you are required to report on your tax return. Yes, this possible outcome feels unfair, but it is the law. Any funds you have received for your normal living expenses are also taxable income.

New Tax Bracket for High Income Taxpayers:  Starting in 2013, there is a new tax rate of 39.6% imposed on taxable incomes over $400,000 for single filers, $425,000 for head of household filers, $450,000 for joint filers and $225,000 for married filing separately filers.

Alternative Minimum Tax: The AMT patch for middle income taxpayers has been made permanent and will be indexed for inflation. The 2012 exemption for single filers is $50,600 and $78,750 for joint filers.

Capital Gains Tax: Starting in 2013, the top capital gains tax rate has been increased to 20% from 15%. The recapture rate is still 25% and the collectibles rate remains at 28%.

New Medicare Tax on Earnings: For high income taxpayers, the Medicare tax on your earnings has been increased by .9%, starting in 2013. The earnings thresholds are $250,000 for joint filers, $125,000 for married couples filing separately and $200,000 for all other filers. Earnings include both wages and self-employed incomes. The collection of this tax is complicated because it is keyed to the total earnings reported on your tax return, an amount you may not know until the end of the year, and your employer’s payroll service certainly doesn’t know. Even if your entire income is reported on W-2 forms, you may need to start paying quarterly estimated taxes. Please speak with us if you are concerned about your withholdings.

New Medicare Tax on Investment and Passive Income: As part of the Affordable Care Act, a new tax is imposed on net investment income starting in 2013. Again, this is a complicated tax and some of its provisions are in dispute. It is a 3.8% tax imposed on the lesser of the taxpayer’s net investment income for the year or the amount of the taxpayer’s Modified Adjusted Gross Income above the following threshold amounts – $250,000 for joint filers and surviving spouses, $125,000 for married couples filing separately and $200,000 for all other filers. Investment income includes interest, dividends, annuities, royalties, rental income, and net capital gains other than gains derived in the ordinary course of a trade or business. However, income from a trade or business that is considered passive (no active participation) is subject to this tax, including pass-through income from S corporations, partnerships and limited liability companies. The tax is also imposed on undistributed net investment income (or AGI at which the highest tax bracket begins) for trusts and estates.

Estate Tax: One of the recent tax law changes concerns the federal estate tax. The top tax rate for estates has been increased to 40% from 35% starting in 2013. The estate and gift tax exclusion was retained at $5 million but is now indexed for inflation, so the 2012 exclusion is $5.12 million. Please remember that the state exclusions in the New York metropolitan area are much lower: the New York exclusion is $1 million, the Connecticut exclusion is $2 million, and the New Jersey exclusion is $675,000. New Jersey also has an inheritance tax.

Itemized Deductions: The phase-outs for itemized deductions and personal exemptions have been reinstated, starting in 2013. The phase-outs begin at incomes of $250,000 for single taxpayers, $275,000 for head of household filers and $300,000 for married couple filing jointly.

Medical Expense Deduction: Starting in 2013, the threshold for deducting your unreimbursed medical expenses has increased to 10% of Adjusted Gross Income. However, for the years 2013-2016, if you or your spouse has turned 65 before the end of the tax year, the increased threshold will not apply and your threshold remains at 7.5%.

Adoption Credit: The adoption credit is no longer refundable for 2012, meaning the credit cannot exceed your tax liability. The credit begins to phase out when your Modified Adjusted Gross Income reaches $189,710 and phases out completely at $229,710. In 2013 the credit will only be available for the adoption of special needs children and limited to $6,000.

Child and Dependent Care Credit: The Child and Dependent Care Credit has been permanently extended. It had been scheduled to expire after 2012.

Child Tax Credit. The child tax credit has been extended for an additional 5 years through 2017.

Education: Among this year’s tax law changes is The American Opportunity Tax Credit, which has been extended for an additional 5 years through 2017.

Deduction for Classroom Expenses: The teacher’s $250 deduction for classroom supplies has been extended through 2013.

Student Loan Interest Deduction: Starting in 2013, the 60-month rule for payments of student loan interest has been eliminated and the income phase-out ranges were increased to $55,000 – $70,000 for single filers and $110,000 – $140,000 for joint filers.

Flexible Spending Accounts: Starting in 2013 the amount of pre-tax contributions an employee can make to their employer’s Flexible Spending or Cafeteria Plan is $2,500.

Discharge of Qualified Mortgage Indebtedness Extended: Up to $2 million of forgiven debt on qualified principle residence mortgage principle can be excluded from income through 2013.

Payroll Tax Relief is Gone: One of the tax law changes that may affect you concerns the Payroll Tax Relief. The employee share of Social Security Tax returned to its previous level on January 1, 2013. It is now 6.2%, up 2% from the 4.2% level of the past two years. Wages subject to FICA are capped at $113,700 for 2013.

Form TD F 90-22.1 – Report of Foreign Ban and Financial Accounts (FBAR): This is a report that must be filed by June 30th for the previous calendar year. It is separate from your tax return. If your interest in foreign financial accounts is $10,000 or higher combined on any given day during the year, you must file an FBAR. Accounts include, but are not limited to, checking, savings, time deposits, securities and brokerage accounts. The penalties for failure to file an FBAR can be severe, so please speak with us if you need to file this report, whether it is for the current year or past years.

Form 8938 – Statement of Specified Foreign Financial Assets: This is a new form, first required to be filed with your tax return in 2012. If you have an interest in foreign bank accounts, stock, securities, foreign entity, etc. please speak with me about your filing requirements.

Standard Mileage Rates: The standard mileage rates for 2012 and 2013 are:

Year Business Medical/Moving Charitable
2012 $0.555 $0.23 $0.14
2013 $0.565 $0.24 $0.14

Retirement Plans: Maximum contributions to retirement plans are as follows:

Tax year/Type of plan 2012 2013
401(k), 403(b) $17,000 $17,500
     50 or older $22,500 $23,000
SIMPLE IRA $11,500 $12,000
     50 or older $14,000 $14,500
SEP-IRA 25% of compensation (contribution capped at $50,000) 25% of compensation (contribution capped at $51,000)
Traditional/Roth IRA $5,000 $5,500
    50 or older $6,000 $6,500

Unmarried Parents:  Please remember that if you are the noncustodial parent and intend to claim your child on your tax return, you must have a written declaration (IRS Form 8332) from the custodial parent that she or he will not claim your child as a dependent for the tax year. That declaration must be signed by the custodial parent and attached to your return. Only the custodial parent is eligible to claim Head of Household, Dependent Care Credit and the Earned Income Tax Credit. The noncustodial parent, if claiming the child, will get the child’s personal exemption, the child tax credit and the educational tuition and fees deduction, if applicable.

Qualifying Child or Qualifying Relative: This is just a reminder that if you have a child living with you in your household who is not related to you, you cannot claim that child as a qualifying child, with all the various benefits that status provides, but you may be able to claim the child as your qualifying relative.

Sales From Internet Sites: If you have sold merchandise on the Internet through sites such as eBay, Craigslist or Amazon, and your total sales were $600 or more, for the first time you may receive a 1099-K from one of these companies. If, like most people, you sell only used, personal items, and if you can document what you paid for these items, there will be no taxable income. However, if you are selling large enough quantities of merchandise to constitute a business, you will need to start reporting business income and expenses.

Social Security Income. Social Security benefits are calculated based on the 35 years that you had the highest eligible income. This is a good reason to maximize your Social Security income if you are nearing retirement. For example, if you have a corporation and have some discretion in identifying income as salary or profit, you may prefer to take it as salary to increase your Social Security earnings.

New York State Tax Law Changes

Residency: The New York State Department of Taxation & Finance has issued new guidelines for determining whether or not someone is a New York State resident. The rules are very strict and are being challenged in court, but you need to know what they are. The determination is based on several factors, but the bottom line is that if you have a home available to you to live in within New York State, the state will consider you a New York resident. It doesn’t matter if other relatives occupy the home or if it is a summer residence you only occupy for a few months a year. If this is a concern, please speak with us.

MCTMT: One of the recent tax law changes that may make you smile concerns the MCTMT tax. Starting on April 1, 2012 the Metropolitan Commuter Transportation Mobility Tax is now being imposed only on net self-employment income of $50,000 or more. It is still .34%. The net income used to calculate this tax is the amount reported on your federal Form SE, subject to self-employment tax. For employers, your payroll must be $312,500 or more for a calendar quarter before the MCTMT is imposed.

Occupancy Tax on Rental of 30 days or Less: If you have short term rentals, whether it is renting out your apartment while you are out of town, a vacation home rental or if you run a Bed & Breakfast out of your home, you need to collect the local occupancy tax on your rental income. This tax is administered at the county level, and you should contact your local tax department for instructions on how to register and pay this tax. Please contact us if you need assistance. If your rental property is in another state, we can help you research the occupancy tax requirements in that state. Occupancy tax does not need to be collected on rental income from year-round tenants in New York State.

Same-Sex Marriages: Same-sex marriages are legal in New York. If you are married, whether it was in New York or somewhere else, you must now file state income tax as either Married Filing Jointly or Married Filing Separately, even though your federal tax returns continue to be filed as Single or Head of Household. Tax preparation becomes much more complex, and in most cases you will owe more New York tax. Even if you file separately, it’s probably wise for you and your spouse to use the same tax preparer to help calculate the most advantageous status and to minimize errors. Civil unions and domestic partnerships are not marriages for New York purposes.

Online Tax Center:  New York State has an online tax center where taxpayers or their tax preparers can look up activity on their accounts, as well as file and pay some of their tax returns and taxes. It is an easy way to pay your estimated income taxes. If you would like to register with the Online Tax Center, please click here.

Voluntary Disclosure Program:  If you have not filed a New York tax return for a past year or have underreported your tax due on any filed return, the New York State Tax Department is making it easier to resolve these problems through its Voluntary Disclosure Program. The program covers all taxes administered by the Department, including income, corporation and sales taxes. To be eligible for the program, you must voluntarily disclose a tax liability not already known to the Department (taxes due on assessment notices or matters already known to the Department are not eligible), enter into an agreement to pay it and agree to report future tax liabilities honestly. If you do this, the Department will not impose any penalties (they will still charge interest) and will not prosecute, even if the failure was a criminal offense. You do not need to know the exact amount of your liability in order to register for the program. If you know, for instance, that you have not filed returns for three past years, you may register for those years and then, if you are accepted into the program, prepare and file the returns. To disclose a tax liability, click here.

529 College Savings Plans: For any New York resident who is in college, has child in college or would like to save for their children’s future college education, the New York 529 plan is a great deal. As long as the funds in a 529 plan are used for qualified tuition expenses, the earnings in the accounts will not be taxed. In addition, you can get an immediate deduction on your New York taxable income for the amount of your current year contribution up to $5,000 ($10,000 on a joint return.)

Pension Income Exclusion: New York allows a taxpayer to exclude $20,000 of pension income per year, provided the income is received after the taxpayer has turned 59½ years old. But you must be careful. If you begin to receive retirement income in the year you turn 59½, you will qualify for the exclusion for only the part of the year in which you were 59½. For example, if you turned 59½ on November 1, 2008, and started to receive payment from an IRA in that year, the only portion of your distribution that would qualify for the exclusion would be what you received after October 31st. Also, any annuity you have purchased for yourself does not qualify as pension income.

A beneficiary may also qualify for an exclusion if the decedent would have qualified, but the decedent’s exclusion must be prorated for all qualifying pension distributions and for all beneficiaries. The beneficiaries’ exclusions will also be reduced by the amount of exclusion claimed by the decedent on his or her final return.

Estate Tax Return: New York State still taxes estates valued at more than $1,000,000. If a decedent lived in New York or owned property in New York, an estate tax must be filed in the state even if no federal form has to be filed.

LLC fee filing deadline: The LLC fee filing deadline for New York State is now February 28th  rather than January 31st.

New York City Unincorporated Business Tax: Charitable donations made through a business bank account may be deductible from the UBT up to 5% of your federal net business income.

To become a new client, or to schedule your tax appointment, please contact our Park Slope accounting office by phone at 718-638-3338 or click here to email us.

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