Tax Law Changes for 2012

By: Jamie Czaplicki, CPA (Jan, 2012)

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was a sweeping tax package that included, among many other items, an extension of the Bush-era tax cuts for two years (2010 and 2011), estate tax relief, a two-year "patch" of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in machinery and equipment, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses. Many of the key elements of the tax relief package expired at the end of 2011. The following is a look at some of the key elements of the package that expired after 2011, and what the rates will revert back to if there is no action to extend these benefits further.

The current regular income tax rates were retained for two years (2011 and 2012), with a top rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains. Beginning in 2013, the tax on qualified dividends and long-term capital gains will revert back to 20%. Employees and self-employed workers received a reduction of two percentage points in Social Security tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed. A temporary extension of the reduction in Social Security tax is in place for 2012 extending this benefit until February 29, 2012.

A two-year alternative minimum tax (AMT) "patch" for 2010 and 2011 provided a modest increase in AMT exemption amounts and allowed personal nonrefundable credits to offset AMT as well as regular tax. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010. For 2012, the exemptions will revert back to the lower amounts that would potentially subject millions of taxpayers to the alternative minimum tax, although Congress has typically provided relief related to AMT on an annual basis in the past.

Key tax credits for working families that were originally enacted or expanded in the American Recovery and Reinvestment Act of 2009 were retained. Specifically, the new law extended the $1,000 child tax credit and maintains its expanded refundability for two years through 2012, extended rules expanding the earned income credit for larger families and married couples, and extended the higher education tax credit (the American Opportunity tax credit) and its partial refundability for two years.

Many of the "traditional" tax extenders were also extended for two years, retroactively to 2010 and through the end of 2011, but are not in place for 2012. Among many others, the extended provisions included the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and the research credit. There were also several specific benefits and credits that expired at the end of 2011 including the expanded adoption credit, the deductibility of mortgage insurance premiums as interest, and the above-the-line deduction of up to $4,000 for qualified tuition and related expenses.

After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010's or 2011's rules.

Under the current laws, businesses can write off 100% of their new equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the law provides for 50% additional first-year depreciation. Bonus depreciation is allowed for federal purposes but many states, including New York, do not allow the additional bonus depreciation. The Internal Revenue Code (IRC) Section 179 expensing limitation was $500,000 for 2011, with maximum purchases of $2,000,000 before phasing out. For 2012, these amounts are lowered to a maximum deduction of $125,000 on a threshold of $500,000 in purchases. Also, the ability to utilize 15 year straight-line cost recovery for qualified leasehold improvements, qualified restaurant building and improvements, and qualified retail improvements expired at the end of 2011.

The IRC Section 41 research and development (R&D) credit and the Work Opportunity Tax Credit (WOTC) expired at the end of 2011, although certain portions of the WOTC related to veterans will remain in place. The temporary 100% exclusion of gain from the sale of certain small business stock under Sec. 1202(a) also expired at the end of 2011.

This is just a summary of some of the major tax provisions that expired as of December 31, 2011. The above list is not all-inclusive as there were other smaller impact items that were set to expire as well. If you would like to further discuss any of these issues please contact your Dermody, Burke and Brown tax advisor.

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