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Federal Income Tax 2012 and Then What?

Federal Income Tax 2012 and Then What?. Tony Curatola Joseph F. Ford Professor Of Accounting and Tax Drexel University. What is on the Horizon?. Higher Taxes for All (Maybe). What is on the Horizon?. Higher Taxes for All Expiring Bush Era Tax Provisions Sunset in 2012

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Federal Income Tax 2012 and Then What?

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  1. Federal Income Tax 2012 and Then What? Tony Curatola Joseph F. Ford Professor Of Accounting and Tax Drexel University Mid-Atlantic Council of IMA

  2. What is on the Horizon? • Higher Taxes for All (Maybe) Mid-Atlantic Council of IMA

  3. What is on the Horizon? • Higher Taxes for All • Expiring Bush Era Tax Provisions Sunset in 2012 • Individual taxpayers • Business taxpayers • Patient Protection & Affordable Care Act Mid-Atlantic Council of IMA

  4. Part 1 Individual Taxpayers Issues Mid-Atlantic Council of IMA

  5. Tax Rates • Noncorporate Taxpayers • 2013: 15, 18, 31, 36 and 39.6 percent • 2012: 10, 15, 25, 28, 33 and 35 percent • Corporate Taxpayers: • 15, 25, 34, 39, 34, 35, 38 and 35 percent Mid-Atlantic Council of IMA

  6. SOI Information for 2009 • Taxpayers filed 81.9 M taxable returns (58.3% of all returns filed); the lowest percentage of taxable returns filed in more than 24 years. • The average tax rate for taxable returns decreased to 12.8%. • The top 1% (~ avg. AGI of $960,000) counted for 16.9% of AGI. • The top 10% (~ avg. AGI of $245,000) accounted for 43.2% of AGI. • The bottom 50% (~ avg. AGI of $15,000) accounted for 13.5% of AGI. • For returns reporting positive AGI, • the top 1% had an average tax rate of 24%; • the top 10% had an average tax rate of 18.1 percent; and • the bottom 50% had an average tax rate of 1.9%. Mid-Atlantic Council of IMA

  7. Individual Tax Provisions2012 and 2013 Tax Rates • Increase income tax rates for individuals • from 10, 15, 25, 28, 33 & 35% • to 15, 18, 31, 36 & 39.6% • Eliminate doubling of 15% tax rate bracket for married filing joint return • i.e., marriage penalty returns (DOMA issue) • Eliminate payroll tax cut of 2% for employee portion of OASDI tax • 4.2% OASDI for employees • 10.4% OASDI for self employed individuals Mid-Atlantic Council of IMA

  8. Individual Tax Provisions2012 and 2013 Deductions • Standard Deduction • Return to 66 2/3rd % (instead of 100%) for married filing joint • Itemized Deductions • 3% phase-out provision returns to those with excess AGI • Approx. $173,650 (MJ) & $86,825 (others) in 2012 • Personal & Dependent Exemption – • Phased-out ratably for AGI in excess of • $260,500 (MJ) & $173,650 (S) in 2012 Mid-Atlantic Council of IMA

  9. Expiring Individual Tax DeductionsIn 2012 or 2013 • Eliminate State & Local General Taxes • Deduct in lieu of State income taxes – extension is proposed • Teacher’s Classroom Deductions • Above the line deduction of up to $250 eliminated in 2012 • Mortgage Insurance Premiums • Deductible as mortgage interest eliminated in 2012 • Inclusion of discharged indebtedness on principal residence in 2013 Mid-Atlantic Council of IMA

  10. Expiring Individual Tax Provisions in 2012Education • Employee Education Assistance: Exclude up to $5,250 of employer sponsored assistance, including graduate courses leading to professional degrees • Exclusion of National Health Service Corps Scholarship Program, and F. Edward Hebert Armed Forces Health Professions Scholarship & Financial Assistance Program • Student Loan Interest • Up to $2,500 of student loan interest deductible (not prepaid interest) above the line for first 60 months of repayment • Phased out begins when MAGI exceeds $40K ($60K for MJ); it was $60K ($125K for MJ). Mid-Atlantic Council of IMA

  11. Expired Individual Tax ProvisionsEducation • Qualified Tuition and Related Expenses • Above the line deduction expired for tax years after 2011 • Phase-out provision • $4,000 where AGI is < $65,000 ($130,000 for MJ filing) • $2,000 where AGI is between $65,000 and $80,000 ($130,000 and $160,000 when filing married joint) • $0 for all others Mid-Atlantic Council of IMA

  12. Expired Individual Tax ProvisionsEducation • Coverdell Education Savings Account • Annual contribution reduced from $2,000 to $500 per year • Age limit applies to special needs beneficiaries • Cannot claim the Coverdell exclusion and the Hope or Lifetime Learning Credit in the same year • Marriage penalty reappears • Phase-out will begin at $150,000 instead of $190,000 for MJ • Phase-out will remain at $95,000 for all others • Elementary and secondary education expenses are not included as qualified educational expenses. • Contributions must be made by yearend (no longer April 15th) Mid-Atlantic Council of IMA

  13. Individual Tax Provisions2012 Education • American Opportunity Tax Credit (old Hope Credit) • For 2012, maximum of $2,500 / year for first 4 years of post-secondary education, and is calculated as • 100% on 1st $2,000, and 25% on next $2,000 • The credit is phased out where MAGI is • Between $160,000 and $180,000 for married filing jointly, • Between $80,000 and $90,000 for all other taxpayers • The credit is applicable to qualified tuition, fees, and course material (was tuition and fees) and may be partially refundable. Mid-Atlantic Council of IMA

  14. Individual Tax Provisions2013 Education • Hope Credit Returns (American Opportunity Credit gone) • For 2013, maximum of $1,500 / year for first 2 years of post-secondary education, and is calculated as • 100% on 1st $1,000, and 50% on next $1,000 • The credit is phased out where MAGI is • Between $80,000 and $100,000 for married filing jointly, • Between $40,000 and $50,000 for all other taxpayers • The credit is applicable to qualified tuition and fees only (no for course material) and it is nonrefundable Mid-Atlantic Council of IMA

  15. Individual Tax Provisions2012 and 2013 Tax Credits • Earned Income Tax Credit • Expanded version is extended to 2012, not reduced by AMT, and retains the 3 or more children category • Revert to pre 2009 rules in 2013, which means • Modified AGI phase-out limits significantly reduced • Reduced by AMT, • Larger marriage penalty, • 3 or more children category is eliminated, and • The IRS will no longer be authorized to deny the credit based on information from the federal child support database. Mid-Atlantic Council of IMA

  16. Individual Tax Provisions2012 and 2013 Tax Credits • Child Tax Credit • The $1,000 credit in 2012 is reduced to $500 in 2013; • It is refundable to the extent of 15% of earned income in excess of $3,000 in 2012 and in excess of $8,500 in 2013 • Child and Dependent Care Credit • Limited to $3,000 ($6,000 for 2 or more children) in 2012 and 35% credit rate where phase out begins at $15,000; • Limited to $2,400 ($4,800 for 2 or more children) in 2013 and 30% credit rate where phase out begins at $10,000. Mid-Atlantic Council of IMA

  17. Individual Tax Provisions2012 and 2013 Tax Credits • Adoption expenses income exclusions/credits • $12,650 in 2012 and $5,000 of expenses per eligible child or $6,000 of expenses per eligible special needs child in 2013 • Above amounts are phased-out for AGI amounts between • $189,750 & $229,710 in 2012, and • Adjusted for inflation in 2013 Mid-Atlantic Council of IMA

  18. Individual Tax Provisions2010 - 2012 AMT Exemption • Tax YearTax Law AMT Exemption Amount    • MFJ & Estate & • SS Unmarried MFS Trusts • For 2002 EGTRRA $ 49,000  $ 35,750  $ 24,500  $ 22,500   • For 2003 – 04 JGTRRA  58,000  40,250  29,000  22,500 • For 2005 WFTRA  58,000  40,250  29,000  22,500 • For 2006 TRA 05  62,550  42,500  31,275  22,500 • For 2007  TIPA  66,250  44,350  33,125  22,500 • For 2008 EESA 08  69,950  46,200  34,975  22,500 • For 2009  Pre-EGTRRA 70,950  46,700  35,475  22,500 • For 2010 TRA 10 72,450 47,450 36,225 22,500 • For 2011 74,450 48,450 37,225 22,500 • For 2012-13 45,000 33,750 22,500 22,500 Mid-Atlantic Council of IMA

  19. Individual Tax ProvisionsGift Tax Exclusion • Gift tax exclusion • $12,000 per year per person for 2007 and 2008 • $13,000 per year per person for 2009 - 2012 • And • $128,000 to a non-US citizen spouse • Estate tax exclusion - Mid-Atlantic Council of IMA

  20. Individual Tax ProvisionsEstate Tax Exclusion • Calendar Estate Tax Gift Tax Highest Estate Tax • YearExemptionExemptionGift Tax Rates • 2001 $ 675,000 $ 675,000 55% • 2002 (03) $1,000,000 $1,000,000 50% (49%) • 2004 (05) $1,500,000 $1,000,000 48% (47%) • 2006 (07) $2,000,000 $1,000,000 46% (45%) • 2008 $2,000,000 $1,000,000 45% • 2009 $3,500,000 $1,000,000 45% • 2010 N/A (Repealed) $1,000,000 Top Indiv Inc Tax Rate • Optional Gift Tax Only • 2011-12 $5,000,000 $5,000,000 35% • 2013 $1,000,000 $1,000,000 55% Mid-Atlantic Council of IMA

  21. Individual Tax Provisions2012 and 2013 Retirement Planning • Contribution to Nondeductible IRA • Taxpayer and spouse - Up to $5,000 per year • Conversion of Traditional IRA to Roth IRA after 2010 (AGI limit repealed) • Include entire taxable amount in year of conversion • Be careful: The 36 and 39.6% tax rates may be back in 2013; hence, tax planning needed here • Conversion of SEP and SIMPLE plans to Roth IRA by small business owners. Mid-Atlantic Council of IMA

  22. Question and Answers . Mid-Atlantic Council of IMA

  23. Part 2 Affordable Care Act And Individual Taxpayers Mid-Atlantic Council of IMA

  24. Medical Deductions • Itemized excess medical expenses • In 2012: Expenses in excess of 7½% of AGI • In 2013: Expenses in excess of 10% of AGI • Exception for 2013 through 2016: • Retention of 7 ½% hurdle for those attaining age 65 by year end. Mid-Atlantic Council of IMA

  25. Flexible Spending Account • Maximum deductible contribution • In 2012: $5,000 • In 2013: $2,500 • Limits will be indexed in $50 increments after 2013 Mid-Atlantic Council of IMA

  26. Medicare Tax on Earned Income • Additional 0.9% Medicare Tax on wages, compensation and self-employment income • Over $250,000 filing MJ; • Over $125,000 filing MS; or • Over $200,000 for all others • Note 1: Marriage penalty exists here and withholdings can be an issue • Note 2: Underpayment penalty applies • Note 3: Thresholds are not indexed for inflation Mid-Atlantic Council of IMA

  27. Medicare Tax on Investment Income • Additional 3.9% Medicare Tax on excess net investment income • Over $250,000 filing MJ; • Over $125,000 filing MS; or • Over $200,000 for all others • Note 1: Marriage penalty exists here and withholdings can be an issue • Note 2: Underpayment penalty applies • Note 3: Thresholds are not indexed Mid-Atlantic Council of IMA

  28. Medicare Tax Calculation • Example: Taxpayer A has wages $190,000 and self-employment income of $40,000. • Result: Taxpayer A has an additional tax of $270 • Calculation: $270 = ($230,000 - $200,000) x 0.9%. • Note: The $270 Medicare tax is part of estimate tax payments. Mid-Atlantic Council of IMA

  29. Medicare Tax Calculation • Example: Taxpayer B has wages and self-employment income of $240,000 and net investment income of $40,000. • Result: Taxpayer A has an additional tax of $1,920 • Calculation: $1,920, which is the sum of • $360 = ($240,000 - $200,000) x 0.9% and • $1,560 = ($280,000 - $240,000) x 3.9%. Mid-Atlantic Council of IMA

  30. Flexible Spending Account • Maximum deductible contribution • In 2012: $5,000 • In 2013: $2,500 • Limits will be indexed in $50 increments after 2013 Mid-Atlantic Council of IMA

  31. Part 3 Business And Investments Mid-Atlantic Council of IMA

  32. Individual Tax Provisions2013 (2012) Capital Gains / Losses • Long Term Rates are: • 10% (0%) for individual taxpayers in the 15% (10 and 15%) income tax brackets • 20% (15%) for all other individual taxpayers • Short Term Rates are: • Ordinary income tax rates • Losses • After applying netting rules, losses offset ordinary income up to $3,000 per year Mid-Atlantic Council of IMA

  33. Individual Tax Provisions2013 (2012) Dividend Income • Dividend Income Rates are: • Taxed as ordinary income in 2013 • Taxed as capital gains rate in 2012 Mid-Atlantic Council of IMA

  34. Business Tax ProvisionsQualified 15-year Recovery Improvements • Statutory 15-yr recovery for pre 2012 property placed in service and 39-yr recovery property after 2011 • Qualified leasehold improvement property • Qualified restaurant property • Qualified retail improvement property • Motorsport Entertainment Complexes • Seven-year straight line recovery if placed in service prior to 2012; • Thirty-nine year recovery property thereafter Mid-Atlantic Council of IMA

  35. Business Tax ProvisionsQualified 15-year Recovery Improvements • Reduced recovery period for qualified Indian reservation property for property placed in service before 2012 • 3-yr property in 2 5-yr property in 3 • 7-yr property in 4 10-yr property in 6 Mid-Atlantic Council of IMA

  36. Business Tax ProvisionsBonus Depreciation • Newly acquired MACRS Property • Under current law • 50% with no cap for purchases up thru Dec 31, 2012 • 50% with no cap for longer production property up thru Dec 31, 2013 • Taxpayer may elect out of bonus depreciation • For luxury car depreciation, $8,000 bonus, which means $11,160 of depreciation in year 1. • Note: What about state income taxes and the new law? Mid-Atlantic Council of IMA

  37. Business Tax ProvisionsAMT Credit in Lieu of Bonus Depreciation • Under 2012 law: • Taxpayer may elect to accelerate the AMT tax credit by forgoing bonus depreciation. • Result: MACRS property is straight-line depreciated for tax years after March 31, 2008 • Under 2013 law: • Prior provision is extended for “round 2 property” • For Sept 9, 2010 thru Dec 31, 2012, it is 100% with no cap • Taxpayer may elect out of bonus depreciation • Extension to Dec 31, 2012 for longer production property Mid-Atlantic Council of IMA

  38. Business Tax ProvisionsSection 179 – Small Business Expensing • For 2012 • Expense up to $139,000 of qualified property • $139,000 reduce by cost of property placed in service > $560K • For 2013 • Expense up to $25,000 of qualified property • $25,000 reduce by cost of property placed in service > $0.2M • $25,000 is not indexed for inflation Mid-Atlantic Council of IMA

  39. Section 179 Expensing • Year Regular Liberty and • Section 179 Enterprise* Start of • DeductionZones Phaseout • 2007 125,000 160,000 500,000 • 2008–2009 250,000 285,000 800,000 • 2010-2011 500,000 535,000 2,000,000 • 2012 139,000 139,000 560,000 • 2013 & thereafter 25,000 25,000 200,000 Mid-Atlantic Council of IMA

  40. Bonus Depreciation • Bonus (or First Year) depreciation rates are as follows: • Year First Year • Deduction • 9/10/01 thru 12/31/04 50 % • 1/1/07 thru 12/31/12 50 % • 9/8/10 thru 12/31/11 100 % • Add a year for longer production property Mid-Atlantic Council of IMA

  41. Global Corporate Tax Rates Mid-Atlantic Council of IMA

  42. Global Competition Mid-Atlantic Council of IMA

  43. Business Tax CreditsNot Extended for 2013 • Wind facility eligible to claim electricity production credit • Production of Indian coal ($2.267 per ton) • Employer provided child care • Work opportunity tax credit for qualified veterans • Long term unused minimum tax credit for individuals Mid-Atlantic Council of IMA

  44. Business Tax CreditsNot Extended for 2012 or 2013 • Electric drive motorcycles, 3-wheeled vehicles & low-speed vehicles • Conversion for plug-in electric vehicles • Alternative fuel vehicle refueling property • Alcohol fuels, biodiesel fuel & renewable diesel fuel • Facilities eligible to claim the refined coal production • Construction of new energy efficient homes • Energy efficient appliance • Mine rescue team training credit • There are many more Mid-Atlantic Council of IMA

  45. Anthony “Tony” P. Curatola, Ph.D.Joseph F. Ford Professor of AccountingDrexel University • Tony Curatola is the Joseph F. Ford Professor of Accounting at Drexel University. He holds an MA degree in accounting (1979) from the Wharton Graduate School of the University of Pennsylvania and a Ph.D. degree in accounting (1981) from Texas A&M University. Tony joined the faculty of Drexel University in 1989 by accepting the appointment to the Joseph F. Ford Professor of Accounting Chair. • Tony has been called on to provide information to the House Judiciary Committee concerning the source tax law. He is a regular contributor to numerous journals, such as The Tax Adviser, TAXES, Oil and Gas Tax Quarterly, National Public Accountant, Benefits Quarterly, Tax Executive, Journal of Pension Planning and Compliance, Tax Notes, and State Tax Notes. Tony’s findings have appeared in media such as Forbes, Washington Post, Money Magazine, Wall Street Journal and The New York Times to name a few. He is currently the Editor of the Tax Column for Strategic Finance, Journal of Legal Tax Research, and is an author of several MicroMash Interactive education courses in the employee benefit area and the Enrolled Agent and Registered Tax Return Preparer’s Review Course of ExamMatrix. Mid-Atlantic Council of IMA

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