1. Lower tax brackets and Marriage Penalty Relief - The lower brackets were maintained at present levels except for taxpayers with $450K in taxable income for Married Filing Jointly, $400K for others. Those in excess will be taxed at 39.6% on the excess of those levels.
2. Payroll tax reduction - The 2% reduction in social security tax expired and was not extended. Social security rate reverts to 6.2%.
3. Capital gain rates - Lower capital gain rates of 0% and 15% remain in place for taxpayers under the income rates mentioned above. For those in excess of these rates, the capital gain rate goes to 20%.
4. 3.8% Medicare tax. Certain investment income, including capital gain, is now subject to a 3.8% Medicare tax for taxpayers with income exceeding $200K, $250K married filing jointly. For taxpayers with rental income and income exceeding these levels, this 3.8% Medicare tax will apply to this investment income. These provisions became law in 2013.
5. Estate, Gift and GST Tax - The estate tax exclusion that was due to revert to $1 million was permanently extended to $5 million, indexed for inflation, making the 2013 exclusion $5.25 million. The tax rate was increased from a top rate of 35% to 40%.
6. Sales Tax Deduction - The ability to choose between state income tax and sales tax as an itemized deduction expired at the end of 2011 but has been extended for 2012 and 2013.
7. Liberalized Child and Dependent Care Rules - This credit was scheduled to be reduced to $2400 per qualifying child, up to 2 children and top percentage reduced to 30%. The 2011 limits of $3000 per qualifying child and 35% of qualifying expenses were reinstated permanently.
8. Child Tax Credit and refundability - Due to be reduced to $500 and no refundable element, the $1000 credit was extended thru 2017 and will continue to be refundable if the taxpayer qualifies.
9. American Opportunity Credit - Due to expire in 2012, was extended for 5 years thru 2017.
10. Mortgage Insurance Premiums - The ability to deduct mortgage insurance premiums as home mortgage interest was due to expire after 2011. It was extended for 2012 and 2013.
11. Phase out of deductions and exemptions - Beginning in 2013, the phase of personal exemptions and itemized deductions will be reinstated for single taxpayers with income over $250K, $300K for married filing jointly. The itemized deductions can be reduced by 80% at 3% of income over the limits. The exemptions are reduced by 2% for every $2500 over the income levels and can be fully eliminated when income exceeds the phase out point by $122,500.
12. Exclusion of principal residence cancellation of debt income - This exclusion was due to expire in 2011 but has been extended for 2012 and 2013.
13. Student loan interest deduction, previously a temporary provision, was made a permanent deduction.
14. AMT - The limits were permanently raised to $78,500 married filing jointly and $50,600 for single. These limits will be indexed for inflation.
15. Adoption Credit was made permanent but is no longer a refundable credit.
16. Non-business energy credit due to expire in 2011 was extended for 2012 and 2013.
17. Educator Deduction - The $250 deduction for educators was extended for 2012 and 2013.
18. Tuition and fees deduction - The above-the-line adjustment of up to $4000 of qualified education expenses was due to expire after 2011 tax year. It was extended for 2012 and 2013.
Although many provisions were extended permanently, many will be back in play after the 2013 tax filing season. Taxpayers and tax preparers should continue to monitor the lawmakers to try to stay ahead of the changes that are bound to occur.
Need tax advice? Please call me and we can set up a time to discuss your personal or business tax situation.
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