New Tax Act What you need to know! Fiscal Cliff tax changes.


By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm 602-292-2009 Please consult with your professional tax CPA regarding your specific circumstances!

The new act is called the Family And Business Tax Cut Certainty Act Of 2012 although it passed the house in 2013. I consider most of the news as good. The only negative news for most of my clients who are still working is that the FICA/Social Security tax withheld goes back to 6.2% from 4.2%. The 4.2% withholding was in effect for 2011 and 2012.

The new tax act does not deal with reduced spending which has been delayed until 2-28-13.

The number one benefit of the new tax act is that most of my clients Alternative Minimum Tax have been reduced dramatically! The number two benefit is that my clients now know that tax rates will be settled for at least 2013 and 2014. In 2015, there will be a new congress and the tax rates may change. We just do not know!

The Act would keep the Bush tax rates intact for individuals with taxable income under $400,000 ($450,000 for married taxpayers, $425,000 for heads of household).

Your 2012 income tax brackets will be the same as 2011 except for inflation adjustments.

Income above the $400K taxable income for individuals and $450K taxable income for married filing jointly will be taxed at a 39.6% rate. Let me clarify. If a married client has taxable income of $500K, the 39.6% higher tax rate is only taxed on the $50K NOT the $450K!!

The new act based on the $400K/$450K numbers has added another tax called the modified adjusted gross income tax.

Let us now discuss the Alternative Minimum Tax correction: The Act permanently patches the alternative minimum tax (AMT). The Family And Business Tax Cut Certainty Act Of 2012 provides exemption amounts for 2012 of $50,600 (individuals) and $78,750 (married filing jointly) and exemption amounts for 2013 of $51,150 (individuals) and $79,850 (married filing jointly. This PERMANENT exemption for Alternative Minimum Tax gives CPA tax planners job easier because we do not have to guess each year whether the Alternative Minimum Tax exemption will be allowed to be used against the Alternative Minimum Tax or not!

Capital gains and dividends. The Act raises the top rate for dividends and capital gains from 15% to 20% for taxpayers who would be subject to the new 39.6% bracket. The good news for my clients is that most of the clients have taxable income under $400K (single), $450K (married) and will only pay capital gains taxes at the 15% federal tax bracket (if all they have are capital gains).

Remember: when clients have ordinary income AND capital gains, the capital gains uses up the lowest income tax brackets and the ordinary income STARTS at the higher tax brackets instead of starting at the 10% tax bracket. Therefore, the reality is that the STATED capital gains rates rate remains at a high of 15% but ordinary tax rates will be applied against ordinary income (i.e. wages, interest income).

Deduction limitations for high-income individuals. The Act reinstates the limitations on the personal exemption and itemized deductions for taxpayers exceeding certain income thresholds. These “take aways” occur when the adjusted gross income is over a certain dollar amount.

Transfer taxes. The Act prevents steep increases in estate, gift and generation-skipping transfer (GST) tax that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation). However, the Act permanently increase the top estate, gift and GST rate from 35% to 40%.

Individual extenders. The Act extends a host of individual provisions, including the treatment of mortgage insurance premiums as qualified residence interest, deductions for State and local general sales taxes, and the above-the-line deduction for qualified tuition and related expenses.

Business tax extenders. Many key business tax breaks are extended including depreciation provisions, notably including bonus depreciation, and the research and work opportunity tax credits.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009