Fiscal Cliff Hits 2012

I have had people say to me: The fiscal cliff items are really all 2013, aren't they? The answer is that they are not. There are a number of items that changed 2012 retroactively, and thus the delay in our ability to file our tax returns (again) this year. Here's a list of 2012 items:

Individual Items

• Direct contributions to charity from an IRA is not treated as income, not deductible, but satisfies the RMD [IRC §408(d)]
• Option to deduct state sales tax instead of state income tax [IRC §164(b)(5)]
• Reduction in income for college tuition and related expenses paid [IRC §222]
• Educator expenses up to $250 [IRC §62(a)(2)(D)]
• Mortgage insurance premium treated as mortgage interest (potentially allowing it to be deducted from income) [IRC §163(h)]
• Higher limits for excluding income from employers for mass-transit and parking benefits [IRC §132(f)]
• Contributions of qualified real property to an organization for the purposes of conservation [IRC §170(b)(1)(E)]
• Treatment of certain dividends on regulated investment companies (e.g., mutual funds) for nonresident alien individuals [IRC §871(k)]

Business Items

• Restored ability to directly expense capital expenditures back to $500,000 [IRC §179]
• Changes can be made to an election to use IRC §179 on a timely-filed amended return
• Off-the-shelf software can be expensed under IRC §179
• Allows use of IRC §179 up to $250,000 for qualified real property including [IRC §179(f)(1)]:
  • Qualified leasehold improvements defined under IRC §168(e)(6)
  • Qualified restaurant property defined under IRC §168(e)(7)
  • Qualified retail improvement property defined under IRC §168(e)(8)
• Extends the period for acquisition of certain qualified small business stock that will have capital gains excluded if held 5 years (does not directly affect 2012 tax returns) [IRC §1202]
• Rules for adjusting basis of stock in a Sub-chapter S corporation related to charitable contributions [IRC §1367(a)(2)]
• Indian employment credit [IRC §45A]
• New markets tax credit [IRC §45D]
• Railroad track maintenance credit [IRC §45G]
• Mine rescue team training credit [IRC §45N]
• Employer wage credit for employees who are active duty members of the uniformed services [IRC §45P]
• Work opportunity tax credit (for non-veterans) [IRC §51]
• Qualified zone academy bonds [IRC §54E]
• Accelerated depreciation for business property on Indian reservations [IRC §168(j)]
• Enhanced charitable deduction for contributions of food inventory [IRC §170(e)]
• Election to expense advanced mine safety equipment [IRC §179E]
• Election for special expensing of certain qualified film and television productions [IRC §181]
• Deduction for specific income related to domestic production activities in Puerto Rico [IRC §199(d)]
• Modification of the tax treatment for certain payments received from controlled entities as it relates to unrelated business taxation [IRC §512(b)(13)]
• Regulated investment company qualified investment entity treatment under the Foreign Investment in Real Property Act [IRC §897(h)]
• Extension of exception for active financing income [IRC §953(e)]
• Treatment of payments between related foreign corporations [IRC §954]
• Empowerment Zone tax incentives [IRC §1391]
• Tax-exempt financing for the New York Liberty Zone [IRC §1400L]
• Temporary increase in limits related to the rum excise tax for Puerto Rico and the Virgin Islands [IRC §7652(f)]
• Extensions related to the American Samoa economic development credit

Whew! Most of these affect very few of us, but certainly they are important to those they do affect and these are viewed by Congress as important for the continued economic recovery. But with a list this long is it any wonder that the IRS will not be able to accept tax returns until the end of January for most returns and late February or early March for some returns?

Fiscal Cliff Modified

About 2 hours ago the House in Congress voted to pass the fiscal bill that originated in the Senate. It certainly does not address everything, and there is plenty of work still to be done. But this blog is not intended to be a political platform, but general information on taxes.

The bill is over 150 pages in length and contains 104 major sections, some of which address more than one tax issue. This blog will not address all of these. Or most of these. Or even a fair minority. But here are some key points that affect a lot of individuals.

• Two years ago Congress made a temporary adjustment to the payroll tax that employees pay, reducing the amount by 2%. That was extended for 2012 as the economy was still hurting. This temporary item has expired and was not extended. Some will lament this is a 2% tax increase, while others will acknowledge that a temporary reduction simply expired.
• AMT is a nasty tax issue that hits only the middle class. While it would be best if this simply went away, at least the annual "patch" was done with indexing for inflation. Finally there will be less ambiguity for those who attempt to create a tax strategy for the year. This will still hit some, but the conditions are now well understood by tax professionals.
• The Child Tax Credit is extended for 5 years (through 2017). That leaves the credit at $1000 per child per year through age 16. There are phase-out factors still.
• There are tax rate increases for those with Adjusted Gross Income over $400,000 ($450,000) for married but those details are too extensive to be treated here. Same for the return of certain phase-outs on itemized deductions and personal exemptions.
• Reduced long-term capital gain rates are extended for those with incomes below $400,000 ($450,000 if married). This too provides for some potential tax planning for some taxpayers.
• The deduction for college tuition was extended through 2013.
• The American Opportunity Tax Credit (replaced the Hope Credit for college tuition) is extended for 5 years (through 2017).
• School teachers expense deduction was extended through 2013.
• The treatment of mortgage insurance as interest was extended through 2013.
• The deduction of state and local sales taxes in place of state income taxes was extended through 2013.
• The ability to exclude from taxable income the debt discharged related to acquisition indebtedness on a principle residence was extended through 2013. (No surprise on this one!)
• The ability to make charitable contributions directly from an IRA and not have to claim the distribution as income (nor does one get to claim the contribution) was extended through 2013. Furthermore  there are provisions to assist taxpayers who desired this but may not have done it "by the book." There is even a provision to do this in January 2013 as a 2012 act. This indicates a very favorable attitude of Congress toward this tax provision.

As I indicated, there are many more issues. It will take some time even for tax practitioners to digest all of what changed and what did not, but if you have a question about a particular item of personal interest, then ask your tax professional. Just don't expect them to have all answers for every provision too soon.