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As we wish you and your family a Happy New Year we’d like to provide you with some insight into the most recent tax legislation affecting your family and business.  Congress passed the American Taxpayer Relief Act early Tuesday morning enacting tax hikes to the wealthiest Americans while extending other pro-business tax incentives. The act’s nontax features include extensions of the emergency unemployment insurance and postponement in automatic cuts in Medicare payments to physicians. It also delays until March automatic federal sequestration that otherwise would have begun this month.

Individual Tax Features

All the individual “Bush era” tax rates are retained with the addition of a new top rate of 39.6% imposed on income over $450,000 for married taxpayers filing jointly. Personal exemption and itemized deduction phase-outs are reinstated at a higher threshold of $300,000 for married taxpayers filing jointly. The capital gains and dividend rate has increased to 20% for those taxpayers in the top bracket and remains at 15% for the middle brackets and zero for taxpayers in the 10% and 15% brackets.  In addition, the law permanently indexes the Alternative Minimum Tax exemption amount for inflation, extinguishing the need for the annual “patching” of the AMT.

The American Opportunity Tax Credit for qualified college tuition expense was extended through 2018, and the above-the-line deduction for qualified tuition was extended through 2013. The Act also extends tax-free distributions from IRA’s to charitable organizations through 2013.

Gift and Estate Tax Features

The estate and gift tax exclusion amount remains unified at $5 million indexed for inflation but the top rate increases from 35% to 40% effective January 1, 2013. Also, the “portability” election, allowing the surviving spouse to utilize the deceased spouse’s unused exemption, has been made permanent.

Business Tax Features

Enhanced depreciation incentives have been extended through 2013 including increased expensing under Section 179 and additional 50% first-year bonus depreciation. Also the fifteen-year straight-line cost recovery for qualified leasehold improvements has been extended.

The Act temporarily extends the 100% exclusion of gain on Qualified Small Business Stock held for more than five years. In addition, it extends the reduction in S corporation recognition period from 10 years to 5 years for built-in gains tax.

The credit for increasing research and development activities has been slightly modified and extended through 2013.

Healthcare Reform Legislation

In addition to the various provisions discussed above certain provisions from the Healthcare Reform Legislation took effect January 1. The employee portion of the Medicare tax, normally 1.45% of covered wages, increased by 0.9% on wages exceeding $250,000 for married taxpayers filing jointly. An additional Medicare tax on investment income also took effect January 1. The Legislation imposes a tax on individuals with modified adjusted gross income greater than $250,000 for married taxpayers filing jointly. The 3.8% tax is on the lesser of the taxpayer’s net investment income or the excess of the taxpayer’s modified adjusted gross income in excess of $250,000 for married taxpayers filing jointly. Net investment income includes interest, dividends, annuities, royalties, rents, capital gain and passive activity trade or business income.

As always should you have a client matter you would like our assistance with, please feel free to contact us.

Regards,

The WealthPoint Team