California Society of Enrolled Agents

California Society of Enrolled Agents 3200 Ramos Circle Sacramento, CA 95827-2513

Tel: 916-366-6646 Fax: 916-366-6674 www.csea.org

CSEA Client Tax Newsletter – January 2013

Dear Client: Happy New Year! We hope you had a wonderful holiday season and we look forward to seeing you at your upcoming tax appointment. This issue of the Annual Client Tax Newsletter contains some of the highlights of the preliminary Senate Finance Committee summary of the tax provisions in the new Act. If you have any questions about these or any other tax-related matters, please let us know when you call to schedule your appointment. We look forward to seeing you soon!

 Tax rates: Income tax rates go up to Clinton-era rates on individuals earning more than $400,000, heads of household (HoH) earning more than $425,000 and married filing jointly (MFJ) filers earning more than $450,000. The Bush-era tax cuts are made permanent for everyone under that threshold. All the Bush-era individual marginal rates (10%, 15%, 25%, 28%, 33% and 35%) are retained and a new 39.6% top rate goes into effect for those over the $400k/$425k/$450k thresholds. Those below the thresholds will see a permanent 15 percent capital gains and dividends rate (and those in the 10% and 15% brackets will see a permanent 0% rate), and those above the rate would pay 20 percent.

 Estate tax: The estate tax is exempted on the first $5 million (indexed for inflation, so $5.12 million in 2012 and an as yet unknown amount in 2013), and assets over that amount will be taxed at 40 percent (current law exempted the first $5 million and taxed the rest at 35 percent). Also, the estate tax portability election, which allows for an election for the surviving spouse’s exemption amount to be increased by the deceased spouse’s unused exemption, has been made permanent.

 AMT: A permanent "patch" for the alternative minimum tax, so no more annual (or biannual) end-of-year waiting games to see if it will be indexed for inflation. This is good news for some 30 million middle class taxpayers, many of whom did not know they were one “patch” away from a large and unexpected tax bill. It’s also good news for tax preparers, since it alleviates the tax administration troubles caused when IRS had to guess how to program its computer systems. This should help immensely in future filing seasons.

 Educator Expense Deductions: The bill extends for two years the $250 deduction for teachers who spend money on classroom supplies, materials, books and software.  Deduction for Qualified Tuition-Related Expenses: Extended through 2013, college students may deduct a maximum of $4,000 (for taxpayers with an adjusted gross income of $65,000 or less, $130,000 for joint returns) or $2,000 (for taxpayers with an adjusted gross income of $80,000 or less, $160,000 for joint returns).

 Mortgage Debt Relief: Also extended through 2013, taxpayers whose mortgage debt is cancelled or forgiven may exclude from income up to $2 million in forgiven debt ($1 million if filing separately).

 Mortgage Insurance Premium Deductibility: Again, extended through 2013, taxpayers who meet income requirements may deduct the cost of mortgage insurance on a qualified personal residence.

 Deduction for State and Local General Sales Taxes: The bill extends for two years the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes.

 Marriage Penalty Relief: Permanently extended are both the increased standard deduction for MFJ taxpayers and the increase of the tax bracket to 15%.

 Tax Relief for Families with Children: Also permanently extended, an expanded adoption credit and adoption assistance program exclusion, an expanded dependent care credit, the credit for employer expenses for child care assistance and the 2001 modifications to the child tax credit, which allowed taxpayers below a certain income threshold to reduce their income tax for each child under 17. The modification increased the credit from $500 to $1000.

 Business provisions: A two-year extension (through 2013) on the Research and Experimentation tax credit, the Work Opportunity Tax Credit, the 15-year straight-line recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements, and an increase in the maximum amount and phase-out threshold of properties under the Section 179 expensing provisions.

Please note: this list above is NOT comprehensive but intended to give you the lay of the land.

How can you be sure you’re receiving the maximum benefits you merit under the law and that you’re not paying more in taxes than you should? Be sure to meet with an Enrolled Agent. Enrolled Agents are federally-licensed tax professionals that can help taxpayers with tax preparation, representation in audit, and advocacy on their behalf.