ENID, Okla. —
The American Taxpayer Relief Act of 2012 (ATRA) permanently extended many income tax provisions that were scheduled to end effective Jan. 1, 2013.
The act also provided for increased income tax, capital gain, FICA and self-employment tax rates. This article presents some of the tax provisions individuals and businesses need to be aware of.
Income tax rates have been expanded effective for 2013 and future years. The new upper rate is 39.6 percent when an individual’s taxable income is more than $400,000 for those filing as single or $450,000 for married taxpayers filing a joint return. The lower bracket amounts of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent remain in effect for 2013 and beyond.
Long-term capital gain tax rates also have been modified. For individuals whose taxable income does not exceed the upper limit of the 15 percent bracket, the tax rate on capital gain is 0 percent. The rate for capital gain is 15 percent for individuals in the 25 percent through 35 percent income tax brackets. A new capital gain rate of 20 percent has been added if taxable income is subject to the 39.6 percent income tax rate. In addition, qualified dividends will continue to be taxed at the same rates as long-term capital gain.
The 2 percent Social Security tax reduction, applicable for 2011 and 2012, was eliminated effective for 2013 and future years. This restores the self-employment tax rate to 15.3 percent for self-employed individuals and the FICA rate to 6.2 percent for employees.
The child tax credit has been made permanent. This provision allows a maximum $1,000 income tax credit per child under the age of 17. This credit is phased out if your modified adjusted gross income is greater than $110,000 (if filing a joint return), $75,000 (for an unmarried taxpayer), or $55,000 (if filing married but separately). The amount of the credit you can take will be limited.
Additional first-year depreciation and the Code Section 179 deduction have been retained for 2013. Additional first-year depreciation allows 50 percent of the cost of qualified business use property to be written off (depreciated) in the year the property is purchased and placed in service. The remaining amount is then to be depreciated using normal depreciation methods. In order to use additional first year depreciation, the asset must be new.
This provision of the tax law is set to expire on Dec. 31, 2013, unless legislation is enacted to keep it effective for future tax years.
The Code Section 179 expensing provision allows a business owner to deduct all or a part of the cost of qualified business use property (much like depreciation) in the year the property is purchased and placed in service. The 2013 maximum expense amount is $500,000 with a $2,000,000 investment limit. Once the investment limit is reached the maximum deduction is reduced dollar for dollar. Without the enactment of new legislation, beginning in 2014 the amount that can be expensed will be to $25,000 and with an investment limit of $200,000. New or used property can qualify for this expensing election.
In addition, effective for 2013 and future years, the Alternative Minimum Tax exemption amounts were increased as well as indexed to the annual rate of inflation. In past years the exemption amounts have had to be adjusted annually through federal legislation to minimize the negative impact on taxpayers.
This is only a brief discussion of a few provisions of the tax law affecting individuals and businesses for 2013 and beyond. Please consult your tax preparer or adviser for additional information concerning these and other tax provisions that are specific to your individual and business situation.
Hobbs is assistant extension specialist for Oklahoma Cooperative Extension Service.