The Child Tax Credit
Tax Breaks for Education
Keeping The Child Care Credit in Mind For Summer
Estimated Taxes - Getting it Right
HCERA - Frequently Asked Questions
What is Proposition 8?
FAQs on DOMA
PPACA - A Healthcare Law Guide For Employees
2013 Federal Poverty Guidelines
The Marriage Tax Penalty
NY NATP S-Corp Flyer
Frank Agostino Biography
The American Taxpayer Relief Act of 2012
Now That The Election is Over - What's Next? (PDF)
President Obama's Outline Tax Policies (PDF)
What's New for 2012 (PDF)
2012 Tax Policies of The Presidential Candidates (PDF)
Seven Steps to Reach Your Retirement Goals (PDF)
Potential Traps for Early Distributions From Qualified Plans (PDF)
401(k) Savings (PDF)
Contemporaneous Tax Records (PDF)
Now That The Election is Over – What’s Next?
President Obama has called on the House to work alongside his tax policies to help the lower and middle-income families and to implement these policies to fix the economy. Of course, the attention is more focused on spending cuts. But, in light of this trend, hurricane Sandy diverted the issue of Benghazi, a possible impeachment of the president could arise but that will be shot down in the Senate. The talk of a Socialist government will spread but won’t take root and a surge of preparedness for insurgence. If Obama’s tax changes take effect, watch out for a stock market correction (rich people will bail) because of loss of the lower capital gains rates. Gold and silver prices will rise (rich people looking for a safe place to park their money due to inflation). Some Supreme Court judges may consider retiring. Our biggest threat is the Fiscal Cliff, which is looming on the horizon.
Fiscal Cliff
At midnight on December 31, 2012, we may see the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the AMT that would take a larger bite, the end of the tax cuts from 2001 -2003, and the beginning of taxes related to the President’s health care law. At the same time, the spending cuts agreed upon, as part of the debt ceiling deal of 2011, will begin to go into effect. Over 1,000 government programs - including the defense budget and Medicare are in line for deep, deep cuts.
- They can allow the tax increases and spending cuts to take effect, weighing heavily on growth and possibly drives the economy into recession, but not under Obama’s watch, or
- Cancel some or all scheduled tax increases and spending cuts thereby adding to t he deficit bringing the United States in line with Europe. The flip side to this; the US debt will continue to grow, or,
- Take the middle ground and limit the budget issues, which would have a more modest impact on growth.
Possible Effects of the Fiscal Cliff
If the current laws slated for 2013 go into effect, the impact on the economy could be dramatic. While higher taxes and spending cuts would reduce the deficit by an estimated $560 billion, the CBO estimates that the policies would cut gross domestic product (GDP) by 4% in 2013, sending the economy into a recession (i.e., negative growth). Predictably, unemployment would rise dramatically because of a two million-job loss. One Wall Street analyst estimates $280 billion would be pulled out of the economy by the sunsetting of the Bush tax cuts; $125 million from the expiration of the Obama payroll-tax holiday; $40 million from the expiration of emergency unemployment benefits; and $98 billion from Budget Control Act spending cuts. In all, the tax increases and spending cuts make up about 3.5% of GDP, with the Bush tax cuts making up about half of that. Frankly, the economy is not in a position to absorb this type of shock.
The cost of indecision is likely to have an effect on the economy before 2013 even begins. Lack of resolution will cause households and businesses to begin changing their spending in anticipation of the changes, possible reducing GDP by a full half-percent in the second half of 2012.
Congress can act to change laws retroactively after the deadline. As a result, the fiscal cliff won't necessarily be an impediment to growth even if Congress doesn't address the issue until after 2013 has already begun. What do you think?
President Obama’s Outline Tax Policies
Last month I provided the outline tax policies of both candidates prior to the elections. Now that President Obama has retained his seat as president, I have streamlined his tax policies for a better understanding of the path he has chosen for economic recovery.
Income Tax Rates
Current Law: The 10,15,25,28, 33 and 35 percent personal income tax rates enacted in 2001 and recently extended by the Tax Relief act of 2010 are scheduled to expire on December 31, 2012.
Obama’ s Position: To continue the Bush personal tax rates except for single taxpayers earning $200,000 or more, or for families earning $250,000 or more. The personal tax rates become 10, 15, 25, 28, 36 and 39.6 percent.
Sidebar: Come January 1, 2013, two new Medicare taxes come alive for higher-income taxpayers ($200,000 or $250,000 for families). The Patient Protection and Affordable Care Act (PPACA) imposes a 0.9 percent additional Medicare tax and a 3.8 percent Medicare contribution tax.
Capital Gains & Dividends
Current Law: Qualified capital gains and dividends are taxed at zero percent for taxpayers in the 10 and 15 percent brackets and 15 percent for all others. This tax break was enacted in 2003 and extended by the 2010 Tax Relief Act scheduled to expire in 2012.
Obama’ s Position: Taxing capital gains at 20 percent rate for persons with incomes over $200,000 and families with incomes over $250,000 after 2012. Taxing dividends as ordinary income and not capital gains for higher income taxpayers also.
Sidebar: Certain large capital gains transactions and special dividends are already set in motion for completion by year-end. The 3.8 percent Medicare tax is being factored into plans to sell before 2013. Many investors are waiting out the election before selling or holding investments and the greatest fear is a precipitous market sell off while the economy is still fragile suggests that the threshold be set at $1 million rather than $200,000 and $250,000 for families.
Child Tax Credit
Current Law: The $1,000 credit was made law in 2001 and most recently extended by the 2010 Tax Relief Act is scheduled to expire in 2012.
Obama’ s Position: Make permanent the $1,000 child tax credit.
Sidebar: Unless Congress extends the Bush Tax Cuts, the effective child tax credit reverts to $500 per qualified child come January 1, 2013. Additional enhancements will also expire and the credit begins to phase out when income exceeds $110,000 for joint filers or $75,000 for single filers.
Child and Dependent Care Credit
Current Law: This credit is based on a percentage of the amount of work-related dependent care expenses paid to a qualified childcare provider and is subject to income limitations. Enhancements to this credit extended by the 2010 Tax Relief Act are also scheduled to expire by the end of 2012.
Obama’ s Position: To extend the child and dependent care credit.
American Opportunity Tax Credit
Current Law: The American Recovery and Reinvestment Act of 2009 renamed and enhanced the Hope Education
Credit as the American Opportunity Tax Credit (AOTC). The 2010 Tax Relief Act extended this credit through the end of 2012 and is slated to expire on December 31, 2012.
Obama’ s Position: Make permanent the AOTC.
Sidebar: The AOTC covers the cost of tuition, fees and course materials up to $2,500 and is based on the first $2,000 spent, plus 25 percent of the next $2,000 spent. This credit begins to phase out for singles with income starting at $80,000 and $160,000 for joint filers. Where the Hope credit was available for the first two years of post-secondary education, the AOTC was made available for all four years of post-secondary education.
Health Care
Current Law: The PPACA and the Health Care Reconciliation Act of 2010 (HCERA) created significant changes to the delivery and taxation of health care. Many of the tax related provisions went into effect in 2010, others in 2011 and 2012, while other provisions are scheduled to go into effect in 2013 and later.
Obama’ s Position: He would retain the PPACA and the HCERA.
Sidebar: You may review the entire law on the website located at http://en.wikipedia.org/wiki/Patient_Protection_and_Affordable_Care_Act.
Personal Exemption Phase-out/ Pease Limitation
Current Law: The temporary repeal of the phase-out of itemized deductions and the personal exemption phase- out (PEP) were extended by the 2010 Tax Relief Act through 2012 and were both applicable to high-income taxpayers. (The Pease Limitation was named after a member of Congress who sponsored the original limitation).
Obama’ s Position: He proposed to allow the temporary repeal of the Pease Limitation and PEP to expire after 2012. For 2013, the Pease Limitation phase-out would start at $178,000 ($89,000 if married filing separate) and the PEP at $267,000 /$178,000. Obama also proposed to limit itemized deductions and other tax expenditures for individuals with incomes over $200,000 and families with incomes over $250,000 by limiting the value of otherwise allowable deductions and exclusions to 28 percent.
Marriage Penalty Relief
Current Law: The 2010 Tax Relief Act extended this penalty relief for taxpayers filing married filing joint through 2012.
Obama’ Position: Proposes to extend the Bush Tax Cuts including the marriage penalty relief for individuals with the exception of a rate increase for single taxpayers with incomes at or above $200,000 and joint filers with income of $250,000 or more.
Adoption Credit
Current Law: This credit was enhanced by the Bush Tax Cuts and extended by the 2010 Tax Relief Act through 2012.
Obama’ s Position: Proposed to extend the enhanced adoption credit
Sidebar: The PPACA made additional enhancements to the adoption credit, which was refundable and expired in 2011. Obama has not proposed to extend the enhancements.
Alternative Minimum Tax
Current Law: The law has dogged Congress for several tax acts with “patches” to prevent the encroachment on middle-income taxpayers. The AMT’s primary purpose was to prevent wealthy persons from paying no income taxes as a result of deductions and credits. Since then, an increasing number of taxpayers have slipped into its grasp as inflation has risen. Without continuation of the AMT patch, an estimated 20 million more taxpayers will be subject to the AMT in 2012.
Obama’ s Position: Obama has proposed to replace the AMT with the so-called Buffet Rule.
Sidebar: Obama’ s so-called Buffet rule ensures that taxpayers making over $1 million annually pay an effective tax rate of at least 30 percent. The Buffet Rule is primarily a long-term proposal; however, Obama already supports a 2012 and 2013 patch through several bills.
Payroll Tax Holiday
Current Law: The current payroll tax holiday is scheduled to expire after December 31, 2012. The employee share of the OASDI tax will increase from 4.2 to 6.2 percent. The employer’s share still remains at 6.2 percent.
Obama’ s Position: Obama has not addressed the payroll tax holiday.
Sidebar: For 2012, the 2 percentage points saved in OASDI taxes provided $2,201 in savings up to the Social Security wage base of $110,100. Based on this number, take home pay for the average worker increased by about $1,000 because of the 2012 extension. Once expired, this would effectively create a tax increase in 2013. In 2012, self-employed persons paid the OASDI rate of 10.4 percent. Without the extension, that rate rises to 12.4 percent. It was also determined that no extension is anticipated for 2013.
Higher Education Tuition Deduction
Current Law: This deduction expired after 2011. The maximum deduction was $4,000 if your adjusted gross income did not exceed $65,000 ($130,000 for joint filers) and $2,000 for adjusted gross income up to $80,000 or $160,000 for joint filers.
Obama’ s Position: Obama proposes to extend the higher education higher tuition deduction.
Other Education Incentives
Current Law: Currently, taxpayers may exclude up to $5,250 in annual employer-provided education assistance until the end of 2012. After 2012, the assistance will be excluded from income only if it qualifies under the working condition fringe benefit rules. The old 2001 rule limiting student loans interest deduction to $2,500 for the first 60 months of repayment returns after 2012 and a few other incentives will be phased out.
Obama’ s Position: Obama has proposed to extend the education incentives for lower and middle-income taxpayers.
Federal Estate and Gift Tax
Current Law: The 2010 Tax Relief Act set the maximum estate and gift tax rate at 35 percent for decedents dying in calendar years 2011 and 2012 with a $5 million exemption ($5.2 million adjusted for inflation for 2012). For 2011 and 2012, the estate of a surviving spouse may also be able to use the unused portion of the deceased spouse’s estate tax exclusion. This method is called “portability.”
Obama’s Position: In light of the current economic debacle, Obama has proposed to set the maximum estate tax rate to 45 percent for decedents dying after December 31, 2012 and an exemption of $3.5 million. He most likely will extend the portability method but the gift tax exclusion will revert to its 2009 level of $1 million.
Sidebar: Unless Congress acts to enable these extenders; the maximum estate and gift tax rates will top 55 percent beginning in 2013. In addition, a 5 percent surcharge will apply to large estates in excess of $10 million.
Tax Extenders
Current Law: Many of the popular extenders, though temporary, expired at the end of 2011. They include, but are not limited to:
- Tax-free charitable contributions from IRAs
- Deduction for qualified home mortgage insurance premiums
- Transit benefits exclusions
- State and local sales tax deductions in lieu of state and local income tax deductions
- Special rules for capital gains real property contributions for conservation purposes; and
- Teachers’ deduction for classroom expenditures.
Obama’s Position: He has proposed to extend the incentives for individuals through 2013.
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