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Escape from the Fiscal Cliff

Second of a Two-Part Series

Last week we discussed several of the changes agreed to by Congress and the President in the Fiscal Cliff tax deal. So now, with layers of a higher tax bracket, Medicare surtax, and a potential phase-out of your deductions and exemptions, you may find your marginal tax rate well into the 40%+ range.

Here’s how 2013 will be different for you:

  • After decades of patching, the AMT limit it has now become permanent. With a base exemption for 2012, there is an automatic cost of living adjustment.
  • The $250 deduction for education supplies for teachers has been restored.
  • The deduction for sales taxes on Schedule A for those of us who can’t deduct income taxes has been extended.
  • The deduction for higher education expenses and the American Opportunity Credit for the same were extended through 2013.
  • The deduction for mortgage insurance premiums and student loan interest were extended.
  • The child credit of $1,000 has new life instead of reverting to the scheduled $500.
  • The $500 lifetime residential energy credit was recharged.
  • Research and development credit for business development of new products and services was also extended.
  • Businesses still have through 2013 to benefit from the 50% bonus depreciation for new equipment purchases and the special 15-year life for leasehold improvements to seasoned buildings.
  • On the estate and gift tax front, Congress generously extended the lifetime exemption of $5 million per spouse, and made the portability option (transferring the unused exclusion to the second to die) permanent. Of course the top tax rate rose from 35% to 40%, but that’s still better than the 55% it could have been.

The award for the most nearly irrelevant extended deduction goes to the on-again/off-again charitable distribution provision from IRA accounts for those over 70½. This new, 2013 law encouraged retirees to make 2012 donations from their retirement funds without increasing their gross income, and enabling them to avoid their annual required minimum distribution (RMD) by doing so.

To spin this change into something practical, the rules extended the time to make these 2012 contributions from your IRA until January 31, 2013. In addition, if you missed your opportunity (because you took your RMD in December 2012) you could recharacterize that withdrawal as tax free by making a contribution of at least the same amount and electing to apply it as having been paid with the RMD. Fun, right?! See how creative Congress can be over a long holiday weekend when they’re tired and frustrated at most everything.

Congress included several more goodies, which we can share with you if you have an hour or so, but this summary covers the big stuff.  Enjoy the short-term calm waters. The financial landscape is still very rugged, and much of this terrain needs to be traveled again by the end of this year.

Can we hope for tax reform in this session of Congress? Not likely, and that’s why we’re here—always accessible, accounting for your future, helping you achieve your goals. Contact us when we can help: office@CPAsite.com or 904-396-5400.

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