I have been getting lots of questions about the new tax implications of the last minute tax changes that were signed into law on January 2nd.The American Taxpayer Relief Act of 2012 (despite the fact it goes into effect for 2013, although some of the provisions are retroactive to January of 2012) is actually one of the most comprehensive and easy to understand pieces of legislation to come out in quite a long time. I think it was because they didn’t have time to put tons of unrelated stuff in this bill. Even so, there are some things in the act that are not related to taxpayer relief. I am not going to go through all the changes because many of them will only affect a few people (and they have nothing to do with income level).  But I will highlight changes that will affect many of you.

Before we get into those, we need to look at the laws that were already in place but did not go into effect until the first of this year. These are the ones that will affect your take home pay; yes that means taxes, but not the ones you pay at the end of the year; these are the ones that you will see on your paycheck or if you are self-employed will affect how much you need to pay for estimated tax payments each quarter.

The social security holiday is over. For the last two years, employees have had 2% less taken out of their checks for social security, the employer portion was still at the original rates and now the employee portion is going back to the original rate as well. That means your paycheck will be smaller. 2% doesn’t seem like much, until you realize that for every $1,000.00 you make, your take home pay will be about $20.00 less than it was last year.

If you make over $250,000.00 as a married couple (that includes all your income – sale of stock, pension plans, rental activities even the taxable portion of social security) thanks to Obama Care, you’re now subject to the .9% Medicare surtax, starting January 1, 2013. This is supposed to be withheld by your employer; however it is based on your entire income. My question is how is an employer supposed to know that you may make $60,000 a year but your wife makes more or you have investment income that puts you over the income thresholds? The short answer is they don’t, unless you tell them to take out the additional Medicare surtax. The better solution is to make sure you make estimated tax payments in addition to your normal withholding.

Now back to the new taxes you should be aware of. The following have been extended for 5 years:

  • The Child Tax Credit
  • The American Opportunity Tax Credit (this is for those who are attending college or have a dependent attending college)
  • Earned Income Credit (for low income taxpayers)

The following were extended for one year so they will expire the end of this year; once again causing problems that congress can save the day by fixing:

  • Mortgage Insurance Deduction
  • Sales Tax Deduction (only if your income tax deduction for state income tax is lower – which only applies to a few states)

One I found interesting was that the IRS can publically distribute the tax information for any state or federal prisoner who the IRS has determined as having filed a false or fraudulent tax return

There were also taxes for businesses that were extended for another year, some of these are very obscure and will only apply to certain industries; such as a credit for railroad maintenance. Here are the ones that will affect most businesses:

  • Credit for wage differentials paid to employees who are also active duty. I really like this one – it means that if an employer has an employee that was called to active military duty, and they continue paying them the difference between what they make on active duty and what they would have made at their regular job, they can take a tax credit for it. It normally only applies to employees who serve in the National Guard or Military Reserves but were called to active duty – normally deployed overseas.
  • Special Bonus Depreciation and 179 Depreciation Limits – this means that equipment and other depreciable assets put into service in 2012 and 2013 may be fully depreciable during the year they were put into service

These are just a few of the provisions in the Fiscal Cliff bill. Forbes Magazine posted a great article on this bill: http://www.forbes.com/sites/anthonynitti/2013/01/02/secrets-of-the-fiscal-cliff-deal/. If you want more information about it, you can read a summary of the bill at the Library of Congress website http://thomas.loc.gov/cgi-bin/bdquery/z?d112:HR00008:@@@D&summ2=m&. They also have the entire document available if you have trouble sleeping and need a good read.

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