The American Taxpayer Relief Act of 2012 – George Mentz JD MBA CWM QFP

Happy New Year and Welcome to 2013. On January 1, 2013, new legislation was retroactively passed the U.S. Senate, and then later in the House of Representatives. The American Taxpayer Relief Act of 2012 (ATRA) would permanently extend a number of major tax laws and temporarily extends many others. Here are the fundamentals.

Federal Tax rates

The top federal income tax rate on working families and small business will increase to 39.6% beginning in 2013 for individuals with income that exceeds $400,000 ($450,000 for married couples filing joint returns). For most other individuals, the ATRA Law permanently extends the lower income tax rates that have existed since President Bush put the tax relief for working families in place. That means most taxpayers will continue to pay tax according to the typical 6 tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) that were used for 2012.

The new taxes implemented on dividends and capital gains were reversed at the last minute. The lower tax rates that applied to long-term capital gain and qualifying dividends have been extended for most individuals as well. If you’re in the 10% or 15% marginal income tax bracket, a special 0% rate generally applies. If the Congress had not acted, the dividend and capital gains tax rates on the poor would have doubled. If you are in the 25%, 28%, 33%, or 35% tax brackets, a 15% maximum rate will generally apply for capital gains. . Beginning in 2013, however, those who pay tax at the higher 39.6% federal income tax rate (i.e., individuals with income that exceeds $400,000, or married couples filing jointly with income that exceeds $450,000) will be subject to a maximum rate of 20% for long-term capital gain and qualifying dividends.

The ATRA American Taxpayer Relief Act permanently extends AMT Alternative Minimum Tax relief increasing the AMT exemption amounts for 2012, and providing that the exemption amounts will be indexed for inflation going forward. The Act also extends provisions allowing nonrefundable personal income tax credits to be used for offsetting AMT liability.

Wealth Phaseout s and Limits on Deductions and Exemptions
Over the years, itemized deductions personal exemptions were limited for higher-income individuals and families. For the last 2 years, the limits have not been operative.

The new laws provides that personal and dependency exemptions will be phased out for those families earning an amount over about 250 thousand dollars per year. Further, deductions will be limited. For both the personal and dependency exemptions phaseout and the itemized deduction limitation, the threshold is $250,000 for single families ($300,000 for married couples filing joint federal income tax returns).

Estate Taxation Relief
The ATRA Act makes the $5 million exemption amounts permanent for the estate tax, the gift tax, and the generation-skipping transfer tax–the same exemptions that were in effect for 2011 and 2012. The top tax rate, however, is expanded to 40% beginning in 2013.
The Act also permanently extends the “portability” provision in effect for 2011 and 2012 that allows the executor of a deceased individual’s estate to transfer any unused exemption amount to the individual’s surviving spouse.

Other Provisions and Temporary Rules

• Exclusion of qualified mortgage debt forgiveness from income provisions extended through 2013
• Section 179 expense limits extended through 2013
• “Marriage penalty” relief in the form of an increased standard deduction amount for married couples and expanded 15% federal income tax bracket
• Expanded tax credits relating to the dependent care tax credit, the adoption tax credit, and the child tax credit
• Rule changes and expansion of: Coverdell education savings accounts, employer-provided education assistance, and the student loan interest deduction
• Charitable IRA distributions (For age 70½ IRA holders- are able to exclude from income up to $100,000 in qualified distributions made to charitable organizations) extended through 2013
• Provisions relating to increased earned income tax credit amounts for people with 3 or more children are extended through 2017
• The $250 above-the-line tax deduction for educator classroom expenses.
• The option to deduct state and local sales tax in lieu of the itemized deductions for state and local income tax.
• The deduction for qualified higher education expenses are all extended through 2013

If you are seeking professional help, please consult with a CWM Chartered Wealth Manager or Accredited Financial Analyst and consult with a licensed professional before making any important decision.

About the Author: Dr. George Mentz is a world recognized consultant and award winning professor who has authored several revolutionary books. Prof. Mentz, an international lawyer, has been a keynote speaker globally in Asia, Arabia, USA, Mexico, Switzerland, and in the West Indies. Mentz can be contacted for speaking engagements at www.gmentz.com  or www.managementconsultant.us  or www.selfhelpbook.org   Mentz is the founder of the American Academy of Financial Management and the US Academy of Business and Financial Management http://aafm.us
*No tax, insurance, investment or legal advice provided herein. Please consult with a licensed professional in your jurisdiction before making any important financial or legal decision.

Starting in 2013, federal and state taxes hikes are set to hit many of the nations hardest working families and retirees. If you have a company or appreciated asset that you are planning to sell, you may want to do it before the end of the year. Beginning in 2013, the cost and taxes on selling any tangible asset or your business may go up by a whopping 60 percent.

The established tax rates on long-term gains and qualified dividends will expire on December 31, 2012. Starting 2013, the federal tax rate on long-term gains will go up to 20% (or up to 10% if a taxpayer is in the fifteen percent tax bracket). In addition to this tax hike, the state income tax is added to the 20 percent. Thus, if you live in New York for instance, your federal and state combined tax to sell an asset for a profit would be about 28% if you add the 8 percent New York state income tax. But wait, there is more. Beginning in 2013, you will also be hit with another new tax on long-term capital gains and dividends where you get whacked with an additional 3.8% “Medicare contribution tax.

Also starting in 2013, the distinction between ordinary and qualified dividends will disappear, and all dividends will be subject to the ordinary tax rates. Thus, the maximum rate on dividends is scheduled to increase from 15 % to max out at 39.6% as the Bush Taxpayer Relief Act provisions expire. Thus, taxes on fixed income dividend assets will go over 100%. I would only assume that these new taxes may hurt the share price and demand for dividend yielding stocks.
To sum it up, if you have worked for 30 years in New York to build a company and you sell your small business for $500 thousand dollars, your federal taxes will go up on that retirement sale from about 15% to a whopping 23.8 percent in federal taxes plus state tax. And yes, you then would owe on top of that another 7 or 8 percent to the state of New York to bring you up to well over $150,000 dollars or 30% percent of your retirement being gobbled up by the state and federal governments.

To make a comparison, there may be some folks in a (state with no income tax) such as: Texas or Florida right now who have recently established residency. By the end of the 2012 year, they can sell their stock or company in a long-term capital gain transaction with the tax rate at a flat rate of 15% or only $75,000 dollars. This is 100% less than what the New Yorker or Californian might pay in 2013. “Viva el la Estado de Texas y la Florida” …..

From a philosophical standpoint, the less federal tax on capital gains, the more money that goes into a local economy where the seller resides. In the end, high capital gains rates tend to freeze up assets, constrict the sale of property, and the middle class generally end up waiting till they die to sell a company so as to avoid the capital gains taxes. Overall, if a taxpaying citizen does not receive a reasonable majority of the proceeds from the sale of a business or property, they will not sell or spend or circulate the money in local communities. Further, if people don’t sell things, taxes are not generated.

This whole capital gains tax debate brings me back to a vivid but real experience. I remember as a teenager reading the list of the Forbes 400 richest people in the world. The list in the 70′s was primarily people who inherited money, businesses, assets, or trusts. This list made me believe that being rich may be just luck and inheriting a 2nd or 3rd generational business. However, after the tax rates were lowered in the 80′s, the list changed quickly over the next few years to be comprised mostly of hard working folks who were “self-made”. Thus, my personal belief in the possibility for all Americans to become prosperous changed. The moral of the story is that lower tax rates helps create new wealth and new abundance. In sum, the incentives for hard work are directly correlated to the potential rewards, and everyone benefits from creativity and inventions in the form of cures, technology, and even tax receipts. And of course, higher taxes reduces global investing into new American ventures that may grow the economy.

For instance, even if you read the self-help book, Super Rich, by the famous music mogul Russell Simmons, you will see that even Mr. Simmons claimed to have used the favorable capital-gains rates to sprinkle around the vast proceeds from the sale of one of his businesses and share some of his good fortune with his workers who loyally invested their energy into his company over the years. I personally commend Mr. Simmons for rewarding his people for their contributions.

In the end, we must continue to think of ways to incentivize the hardest working and provide reasonable benefits for those who contribute with great creativity and effort.
Some Ideas for our Readers to Avoid Undue Tax:
1. Subchapter S Corporations may be more useful going forward to mitigate self-employment taxes or other taxes. However, dividend rates are going up if nothing is done by the administration.
2. The Purchase of ETFs, Funds or Stocks that do not produce interest or dividends may be a better investment for long term growth. iShares S&P 500 Growth Index Fund (NYSE: IVW) and WisdomTree LargeCap Growth Fund (NYSE: ROI) Read more: http://www.benzinga.com/analyst-ratings/analyst-color/12/02/2320350/growth-etfs-for-all-seasons#ixzz20LhXdkeF
3. Use of Tax Deferred Variable or Fixed Annuities or Self Directed 401Ks or IRAs may also become even more popular.
4. Read my previous article on Estate Tax Adjustments in 2013 and learn to prepare for those tax hikes and changes.
5. Consider donating appreciated assets to charity rather than cash to avoid undue taxes.

Dr. George Mentz is a world recognized wealth management commentator and professor who has authored several revolutionary books. Prof. Mentz, an international attorney, has been a keynote speaker globally in Asia, Arabia, USA, Mexico, Switzerland, and in the West Indies. Mentz can be contacted for speaking engagements at www.gmentz.com  or www.managementconsultant.us  To become a Chartered Wealth Manager please contact the AAFM

*No tax investment or legal advice provided herein. Please consult with a licensed professional in your jurisdiction before making any important financial or legal decision.

http://www.irs.gov/taxtopics/tc409.html

http://www.benzinga.com/personal-finance/financial-advisors/12/06/2691411/new-tax-rates-and-adjustments-for-2012-income-and-

http://www.smartmoney.com/taxes/income/what-obamacare-may-mean-for-taxes-1335896160486/

http://www.thestreet.com/story/11598139/1/time-to-avoid-2013-capital-gains-hike-is-now.html

http://businesscertification.org