2012 and FORWARD 

We entered the New Year surely unsure of the future of taxation in the United States. All of the Bush tax benefits end on December 31, 2012 unless Congress acts. It seems that the last time Congress acted was for a variety show. Hopefully I underestimate them.

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Of immediate interest is that certain things already have dropped out of the tax code unless Congress reinstates them postmortem. For the past several years individuals have had an opportunity to deduct sales taxes as an itemized deduction if it exceeded their state income tax payments (a certainty for states with no income tax); this is out in 2012, as is a deduction by teachers of $250 on page one of their returns. Also gone are the page one deduction for education, direct contributions to charity from IRAs, and the energy property credits. We commented in our last article about the limitations on depreciation. Perhaps most important, the additional credits against Alternative Minimum Tax (AMT) also disappear, which will greatly increase the cost and the number of individuals trapped in AMT.

Incidentally there is a hidden tax increase in the payroll tax law that was passed just before the end of the year. The law requires recapture of the 2% saving if a taxpayer’s earnings exceed the maximum social security amount for the months of January and February (that would be $9,175 per month). This would be collected as an additional tax on the individual’s 2012 tax return. How this will be implemented is mind-boggling; we need to wait and see.

The year 2013 is a watershed year. Besides the end of all income tax benefits of the Bush years, we encounter a new tax to help defray the costs of the Health Care law. It is based upon 3.8% of “investment income” for individual returns with Adjusted Gross Income (AGI) exceeding $200,000 and joint returns with AGI in excess of $250,000. Investment income includes dividends, interest, capital gains, and purchased annuities. All retirement income is excluded. The tax is based on the lower of investment income or the amount by which AGI exceeds the $200,000/$250,000 figure.

For example, if a married couple had $50,000 of investment income and their AGI was $280,000, they would pay tax of $1,140 (3.8% of $30,000) (280-250). If their AGI was $240,000, they would pay nothing. There have been e-mails floating around that residences would be taxed upon sale. This is very limitedly true, since capital gains are considered investment income. But there is a “permanent” exclusion of $500,000 of profit on the sale of a qualifying residence before it becomes taxable as a capital gain. Thus this tax on the sale of a residence, while possible, will be extremely rare.