I was lucky enough to head out to Pasadena at the beginning of the month to enjoy some great weather, fun visits with relatives, and a good Badger game. The only downside was that I found myself glued to every television monitor I saw. My concern, of course, was whether an agreement had been reached to extend some of the tax provisions that had already expired on Jan. 1.
As we all know, a compromise was reached, and we have a new tax law called the American Taxpayer Relief Act of 2012.
This agreement extended some of the prior tax rules, made certain temporary rules permanent, and changed some of the rates for taxpayers whose incomes exceed thresholds of $400,000 (single) and $450,000 (families). We tax practitioners waited to make plans for the future, as did IRS and tax software vendors. We are now again faced with a tax season in which clients need to get returns completed early and are anxious to get their refunds, and we will again wait for the regulators to catch up with the rest of us.
I mention this only so you understand that electronic filing will be held up until 2012 forms can be finalized, software can be updated, and regulators can prepare to accept the many changes that have now occurred.
At my firm’s website, www.rpb.biz, we’ve posted some good summaries of what is included in the act. I would encourage you to check the website or any other reliable literature. There are many changes that will affect us this year and going forward.
We know that the tax rate for the highest-income individuals will go up under the new act. Top capital gains rates also increased from 15% to 20%. The AMT (alternative minimum tax) has been a hot topic because the exemption amounts were previously adjusted only on a temporary basis. At year-end, there was always a chance the exemption amount would remain at the lower levels and many more people would pay this tax. The act provided relief by applying a permanent patch.
Under the new law, there are also many provisions that will affect higher-income taxpayers. Examples include limitations on itemized deductions, the phase-out of the personal exemption for certain taxpayers, and a higher estate tax rate. Of course, there are many more provisions that could be discussed, but I want to make a point that every person’s situation is different. Without some of the changes, many lower-income taxpayers would also be hit with higher taxes.
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All taxpayers need to prepare for the changes, educate themselves if preparing their own returns, and double-check whether they are using tax software that has been updated to reflect the new law. Not doing so could cause serious problems with this year’s tax filings. Rushing will not help.
Be sure to keep in mind that tax planning should always be considered across years. Don’t look at the impact only on 2012 – or 2013. Look at what you plan to do in the future. Will you retire? Have a child? Get married? Divorced? All of these could affect your taxes dramatically. Be sure to consider the tax impact across several years if you really want to pay the minimum required tax obligation. Diligence will pay off!
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