Past the First Fiscal Cliff on January 2, 2013

As you are aware from public media, late last night the House of Representatives approved the Senate’s American Taxpayer Relief Act of 2012, thereby firmly endorsing the adage that “the time it takes to do a job expands to fill the time available to do it.” I’ve read all 157 pages of the Bill and below are the highlights of the tax provisions, as I interpret the legislation, that I think will be important to most taxpayers (individuals and businesses), including some you won’t find in the local papers.

First. A comment on the hype that “taxes for 99% of Americans will not go up as a result of this Bill”; I disagree. This Act deals primarily with income and transfer taxes, but it fails to extend the 2% payroll tax reduction that has been in place for the past two years. The IRS has instructed employers to begin withholding the increased payroll tax from employee checks as soon as possible. That means your social security tax withholding from each paycheck will increase from 4.2% to 6.2% (note: that’s almost a 50% increase) on the first $113,700 of wages for 2013, or a potential annual increase of almost $2,300 for the highest wage earners. This will also affect those individuals who are subject to self-employment tax.

Income Tax Rates. Effective for 2013, the highest marginal tax rate now climbs to 39.6% (up from 35% – a 13% increase) on taxable incomes in excess of $450,000 for married persons filing jointly, $400,000 for single taxpayers, $425,000 those filing as head of household, $225,000 for married persons filing separately, and $7,500 for non-grantor trusts and estates. These amounts will be adjusted for inflation beginning in 2013.

Phase-out of Itemized Deductions. The benefit of itemized deductions is again limited for high-income individuals. These benefits begin to phase out for taxpayers with adjusted gross income of $300,000 for married taxpayers filing jointly, $250,000 for single taxpayers, $275,000 for those filing as head of household, $150,000 for married taxpayers filing separately. This provision does not apply to non-grantor trusts and estates. These amounts will also now be adjusted for inflation.

Phase-out of Personal Exemptions. The benefit of many personal exemptions is also again limited for high-income taxpayers. The phase-out begins at the same amount of adjusted gross income as for the phase-out of itemized deductions discussed above. Medical expenses, investment interest and casualty, theft, and wagering losses are not subject to the phase-out.

Estate, Gift, and Generation-Skipping Transfer Taxes. The exclusion amount for transfers at death, during lifetime, and for generation-skipping transfers remains at $5 million (as currently indexed for inflation to $5.12 million for 2012), but the maximum rate on transfers in excess of this amount increases from 35% to 40%. “Portability” is now made permanent. These provisions are effective for decedents dying, generation-skipping transfers, and lifetime gifts after December 31, 2012.

Capital Gains and Dividends. The maximum tax rate on long-term capital gains and qualified dividends increases by one-third from 15% to 20% for higher income individuals using the same $450,000, $400,000, etc. thresholds for ordinary income. Remember, however, that both interest and dividends for all taxpayers are subject to an additional 3.8% Medicare tax after 2012.

Alternative Minimum Tax. ALTMIN has been a perennial problem because the low exemption amount that threatens to subject to millions of taxpayers to the ALTMIN flat tax rates each year. To mitigate this problem, Congress has been required to “patch” the exemption amount every year with an inflation adjustment. The permanent exemption amount has now been raised to current the level and the annual inflation adjustment has finally been made permanent. In addition, all non-refundable tax credits that apply to one’s regular income tax will apply to the ALTMIN tax for years after 2011.

Conversion of Section 401(k) Plans to Roth IRAs. This is a fund raising provision to incentivize individuals with large balances in 401(k) plans to convert those balances to Roth IRAs by paying the income tax on the converted amounts now in exchange for continued tax-free growth, tax-free distributions in the future, and elimination of the annual minimum distribution requirement at age 69-1/2. We have had this opportunity for regular IRAs for years but it did not include 401(k) plans. The decision to convert is highly complicated and depends on your time horizon for distributions, and your guess as to future tax rates and rates of growth and inflation. Get professional investment advice before jumping off and converting.

Extenders. Certain expired or expiring provisions have been extended. These include (but are certainly not limited to):

  • the American Opportunity Tax Credit (for education) through 2017;
  • the basic $1,000 Child Tax Credit is made permanent and the $3,000 earnings threshold for the refundable portion of this credit is extended through 2017;
  • the Earned Income Tax Credit through 2017;
  • above-the-line deduction for $250 of certain educator expenses for 2012 and 2013;
  • the $2 million income exclusion from discharge of mortgage income debt on a principal residence is extended through 2013;
  • mortgage insurance premiums treated as qualified residential interest for 2012 and 2013;
  • the election to deduct certain state and local sales taxes (in lieu of state and local income taxes) for 2012 and 2013;
  • charitable contribution deduction of capital gain real property for conservation purposes for 2012 and 2013;
  • above-the-line deduction for certain qualified tuition and related expenses for 2012 and 2013;
  • tax-free distributions from IRAs (but still not 401(k) plans) for charitable purposes by individuals 70-1/2 or older years of age is extended for 2012 and 2013. Importantly, the Bill provides a couple of planning opportunities for these distributions. The first is that such distributions made in January of 2013 may be recharacterized as having been made in December of 2012. The second is that an otherwise taxable distribution from an IRA to an individual taken in December of 2012 may be excluded from 2012 income if transferred to charity during January of 2013;
  • the business research tax credit for 2012 and 2013;
  • employer wage credit for employees who are active duty military for 2012 and 2013;
  • work opportunity tax credit for 2012 and 2013;
  • 15-year straight-line depreciation period for specified leasehold improvements for 2012 and 2013;
  • enhanced charitable contribution deduction for gifts of food inventory for 2012 and 2013;
  • the election to expense, rather than depreciate, $500,000 of certain business property, including certain computer software, will apply in 2013, but still reverts to $25,000 in 2014;
  • exclusion of 100 percent of the gain realized on certain small business (not S corporation) stock is extended for 2012 and 2013;
  • basis adjustment to the stock of S corporations for charitable contributions of property for 2012 and 2013;
  • 5-year (rather than 10-year) period for reduction for S corporation built-in gains tax is extended for 2012 and 2013;
  • bonus first-year depreciation for 2012 and 2013; and
  • credit for energy-efficient new and existing homes and appliances for 2012 and 2013.

I realize that this is a long summary and it only addresses the tax provisions, not pages and pages of health care changes and the extension of unemployment benefits. You will be pleased to note, however, that as a result of this Bill, milk is not going to $7 a gallon this week. Also remember that this legislation only gets us over the first “fiscal cliff.” We now face three more in the next few months.

If you have questions, please call or email me.


Copyright 2013 Ronnie C. McClure, PhD, CPA

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“Fiscal Cliff” Early January 1, 2013

Happy New Year!

Steve LaTourette, Republican Congressman from Ohio, said it best on CNN yesterday. "Until people [meaning members of the House and Senate] start putting the next generation and the future of this nation ahead of the next election, we’ll continue to have this problem." Well, they didn’t and we do.

While the Senate passed a tax bill late last night, that does not take us back from the “fiscal cliff.” If fact, it creates three new “cliffs” for Congress to hurdle soon. In addition, the Senate Bill, the American Taxpayer Relief Act of 2012, now goes to the House where passage is uncertain at best. The House is expected to take up the Bill, all 157 pages of it, today. Don’t be surprised to see amendments that will have to go back to the Senate for approval. The three new “cliffs” to hurdle are (1) the debt ceiling, (2) sequestration, and (3) the fiscal year 2012-2013 Federal Budget.

The Debt Ceiling. If you remember, it was the last debt ceiling crisis that gave us the original cliff of December 31, 2012 and caused a reduction in the credit rating of the United States. That can has now been kicked down the road until February or March of 2013. At that time, we’ll need to borrow more money and the battle royal over spending cuts will resume in Congress and the White House. The make-up of the Congress will have changed slightly by then, but don’t expect any major changes in positions. Do expect the markets and other global economies to react unfavorably.

Sequestration. The original “cliff” contained provisions that would sequester (confiscate) major spending for all governmental programs including the military, social, and health programs. The plan was to force a decision on these budget cuts by December 31. That didn’t happen. Those decisions have now been postponed for two months.

Budget. The fiscal year of the United States begins October 1 of each year. Congress didn’t pass a 2012-2013 budget last year, but adopted a “continuing resolution” to keep the government functioning until March 27, 2013. It will be Gettysburg all over again in March.

I have a copy of the Bill the Senate passed last night and I have already begun another newsletter to highlight its major provisions. I won’t send it to you until the House acts (or does not act) later today.

Enjoy your New Year’s Day!


Copyright 2013 Ronnie C. McClure, PhD, CPA

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“Fiscal Cliff” on December 28, 2012

“Fiscal Cliff” on December 28, 2012

I’m sure you heard the president’s short message this evening about getting a tax bill out of Congress before the January 1st “fiscal cliff.” A short message, full of sound and fury, signifying virtually nothing.

The only thing the president mentioned was maintaining current tax rates on middle income Americans and extending unemployment insurance. While those are important, it is simply window dressing. No mention of expiring tax provisions for both 2012 and 2013, patching the alternative minimum tax, and the all-important issue of estate, gift, and generation-skipping taxes which go up enormously in January. He only promised budget cuts to come sometime in 2013 and there’s no assurance he can deliver on that.

The financial problems the United States faces are not economic; they are political. Point the finger at the House of Representatives, the Senate, the White House, Republicans, or Democrats and you’ll be pointing in the right direction. It has become a matter of personal egos without regard to the fundamental fiscal overhaul that nation truly needs.

I am somewhat hopeful that what he asked will get done before the first of the year, but it is painfully short of what is needed. To do this will only allow politicians to say, “We did something.” There is so much more that needs to be done and there is no guarantee that it will be done anytime soon. In my opinion, the markets and the worlds’ economies will simply not accept these small steps as moving us back from the “cliff.”

I’ll update you over the next week and things do, or quite possibly DO NOT, develop.


Copyright 2012 Ronnie C. McClure, PhD, CPA

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Important Transfer Tax Changes in 2013

One final blog post for today. This one will address the very important estate, gift, and generation-skipping tax law changes that are scheduled to occur on January 1, 2013.

As you are aware, the nominal transfer tax exemption equivalent is $5 million for 2012 which has been inflation adjusted to $5,120,000. This means that every individual may transfer at death or during lifetime prior to January 1, 2013, a total of $5,120,000 ($10,240,000 for a married couple) to anyone, outright or in trust, without imposition of estate, gift, or generation-skipping taxes. While an estate or gift tax return may be required, the tax will be zero. Under present law, this amount will be significantly reduced to $1 million for 2013 and future years (other than an adjustment for inflation). In addition, under current law the maximum transfer tax rate is 35% in 2012, but will go to a maximum rate of 55% for 2013 and future years. This combination of changes will produce a big hit! Consider a very simplified example; a transfer by husband and wife of $10,240,000 prior to December 31, 2012 (assuming no prior taxable gifts) will result in zero transfer taxes (assuming the proper generation-skipping tax allocations are made). The same gift made on or after January 1, 2013 would result in transfer taxes of approximately $4,532,000!

In my opinion, the likelihood of Congress retaining the $5,120,000 exemption after 2012 is extremely slim. An exemption amount of $3,500,000 has been thrown around and may offer a comprise amount. Remember that any significant reduction will impact most of the very Congressmen and women who will be voting on the change. How likely are they to shoot themselves in the foot? It’s hard to tell at this point, but knowing Congress . . ..

What to do, oh, what to do? Individuals with current net worth in excess of $1,000,000 should consider gifts to children or other family members or friends in 2012 to take full advantage of the current exemption amount. Even if they are over the exemption amount, the tax hit for 2012 will only be 35% rather than the looming 55%. While outright gifts will accomplish the goal of eliminating or reducing the transfer tax, these taxpayers should perhaps more appropriately consider gifts into generation-skipping trusts to maximize ultimate after-tax transfers to grandchildren. Gifts made through family limited partnerships are also appropriate. Settings up trusts and/or family limited partnerships take time to complete and should not be deferred until late in 2012.

Another prudent 2012 year-end transfer tax planning opportunity is to make gifts of $13,000 each (total for the year) ($26,000 for a married couple) to an unlimited number of individuals. These gifts are not subject to transfer taxes if the beneficiary can immediately enjoy the benefits of the transfer. No gift tax return is required to report them. In a similar manner, paying medical or education expenses of $13,000 on behalf of another individual qualify for these favorable provisions if the payments are made directly to the provider (doctor, medical facility, or school). Consider another simple example. Mom and Dad can make combined gifts of $26,000 in 2012 to each of 10 individuals (or pay medical or education expenses on their behalf). This removes $240,000 from Mom and Dad’s potentially taxable estate prior to 2013. These provisions should remain unchanged for years after 2012 except that the amount increases to $14,000 ($28,000 for the couple) due to an inflation adjustment. Consider this, make the $240,000 transfers prior to December 31, 2012 and another $280,000 to (perhaps) the same individuals on January 1, 2013. This combination of transfers results in removing $520,000 from Mom and Dad’s taxable estate if they should die after January 1st of next year, potentially saving them approximately $286,000.

Current transfer tax law contains a “portability” provision. Portability allows a surviving spouse the ability to use the unused portion of the predeceased spouse’s exemption equivalent. The purpose of portability was to eliminate the need for transfer tax “credit shelter trusts” in small estates. This provision expires at the end of 2012, but is very likely to be renewed. Portability is not automatic and must be elected on a timely filed estate tax return of the decedent spouse. Yes, that means that even small estates that would otherwise not have to file an estate tax return must do so to elect portability. My personal opinion is that portability is not necessarily a good thing and should not be relied on to ensure that the estate of the first to die of the couple ultimately goes to the decedent’s intended beneficiaries. For both tax and non-tax reasons, I continue to recommend credit shelter trusts in clients’ wills.

Transfer tax changes will be the subject of much Congressional debate in the coming weeks and months and will not necessarily be tied to income tax changes. I’ll watch these developments and update this information as the debate proceeds to enactment.

Questions? Call or email me. I’ll share what I know at the time. It’s likely to be a moving target.


Copyright 2012 Ronnie C. McClure, PhD, CPA

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New Taxes for 2013

In addition to the pending tax law changes that I have discussed in earlier blog posts today, there are new taxes that are effective for 2013 and future years. These come from Obamacare which is now likely to survive unchanged.

There will now be an additional Medicare tax on earned income (wages or self-employment income) for higher income individuals. This new tax will be 0.9% of earned income in excess of $250,000 for married taxpayers filing a joint return, $125,000 for married taxpayers filing separately, or $200,000 for single taxpayers. Wages from all employers (for both husband and wife) will be combined, along with self-employment income (for both spouses) to arrive at total earned income for the return. Note that this tax is based on total earned income and not on adjusted gross or taxable income. This means that some taxpayers may have little or no adjusted gross income or taxable income and still be subject to this tax. Note also that this tax may exacerbate the marriage penalty (discussed in an earlier post).

There is also another new Medicare tax equal to 3.8% on net investment income. Net investment income includes rents, royalties, annuities (not including IRAs), interest, dividends, passive income, and net gain from the sale or disposition of property. While there is an adjusted gross income threshold amount of $250,000 for a joint return, $125,000 for married individuals filing separately, or $200,000 for single taxpayers, this threshold amount is deceiving. The additional tax is actually based on the lesser of total net investment income or the amount that adjusted gross income exceeds the threshold amount. While business, rental, partnership, and S corporation expenses may reduce adjusted gross income, itemized deductions do not. Therefore, taxpayers with adjusted gross incomes of less than the threshold amount will still be subject to tax if they have net investment income. Bummer! This tax may also exacerbate the marriage penalty.

Also scheduled for 2013, the itemized deduction for medical expenses will be reduced by 10% of adjusted gross income, unless either the taxpayer or the taxpayer’s spouse turns 65 before the end of the year for 2013-2016. For the past some number of years, this reduction has been 7.5%.

For a health flexible spending account to be a qualified benefit under a cafeteria plan after 2012, the maximum amount available for reimbursement of incurred medical expenses of employee, employee’s covered spouse and dependents, must not exceed $2, 500. There is no limit on the maximum amount for 2012.

Who knows what other “net” tax increases will occur in 2013, notwithstanding the mantra of “no new taxes or higher tax rates.” I’ll keep you posted as Congress takes (or does not take) action.


Copyright 2012 Ronnie C. McClure, PhD, CPA

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More on 2012 Expiring Tax Law Provisions

In this blog entry, I address tax law provisions in effect for 2012, but which expire at the end of this year unless Congress extends them. For the most part, these represent the “Bush era tax cuts” that, under current law, expire at the end of the year and over which there has been so much debate. As you are aware, there is strong support on both sides of the Congressional aisle for extending the majority of these, with the primary bones of contention being income tax rates and limitations on itemized deductions for wealthy individuals. I will update this blog entry as developments warrant over the next few weeks.

  • The highest long-term capital gains rate is currently 15%, but is currently scheduled to increase to 20% after 2012. (Keep in mind, that’s not a 5% change, but a 33-1/3 % increase!) If the Bush era cuts are extended, this rate will remain at 15%.
  • Dividend income (currently taxed at the maximum rate of 15%) is scheduled to be taxed as ordinary income beginning in 2013. This could be as high as 39.6% for individuals with adjusted gross income over $250,000. In addition, dividends will be subject to the Obamacare surtax of 3.8% applicable to “net investment income.” In the worst case, for individuals with adjusted gross income over $250,000, dividends will be taxed at 43.4% (an increase of 289.33% over 2012)! That’s gonna hurt! Surely Congress will address this.
  • The tax brackets for ordinary income in 2012 are 10%, 15%, 25%, 28%, 33%, with the highest bracket ratcheting up to 35%. These brackets are scheduled to increase in 2013 to 15%, 28%, 31%, 36%, with the highest bracket rising to 39.6% for individuals with adjusted gross income of over $250,000. For most of us, the 2012 brackets are likely (hopefully) to be extended with the 39.6% bracket for wealthy individuals remaining in question.
  • Our friendly Wikipedia (it’s easier to read than the Internal Revenue Code, but lacks “substantial authority”) tells us that “marriage penalty relief refers to the higher taxes required from some married couples, where spouses are making approximately the same taxable income, filing one tax return (‘married filing jointly’) than for the same two people filing two separate tax returns if they were unmarried (i.e., filing as ‘single’, not ‘married filing separately’).” Marriage penalty relief applies only to individuals in the 10% and 15% brackets. The size of the relief bracket is 200% for 2012, but is scheduled decline to 167% in 2013. This means that, unless changed, more couples will be subject to the marriage tax penalty.
  • The basic standard deduction for married individuals filing jointly is 200% of the single individual standard deduction for 2012. This is scheduled to decline to 167% for 2013 meaning married individuals claiming the standard deduction will have higher taxable income.
  • In 2012, itemized deductions and the personal and dependency deductions are not reduced for individuals at higher levels of adjusted gross income. In 2013, these “Pease” provisions are scheduled to re-emerge with itemized deductions and personal and dependency deductions being “phased out” depending upon levels of adjusted gross income.
  • Under current law, additional 50% first year “bonus” depreciation applies to qualifying business property, including new personal property and certain qualified leasehold property placed in service in 2012, but not for 2013. Look for this to be extended.
  • In 2012, the maximum expensing limit for purchases of new qualifying property is $139,000. For 2013 this limit is scheduled to drop dramatically to $25,000 (indexed for inflation). While the final 2013 amount may not remain at $139,000, it surely will be set higher than $25,000 to spur business investment in qualifying property.
  • For 2012, cancellation of indebtedness income on a primary residence can be excluded (up to $2,000,000 of acquisition debt on the primary residence), but this provision is scheduled to expire at the end of this year. (The excluded amount reduces the basis of the residence resulting in greater potential gain when the residence is sold.) At this point, I don’t have a sense as to what will happen to this exclusion.
  • There are many provisions in the estate and gift tax law that are scheduled to change dramatically starting after 2012. These potential changes will be the subject of a forthcoming blog entry.

As with other potential changes, I’ll update you as developments occur.


Copyright 2012, Ronnie C. McClure, PhD, CPA

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Expired or Expiring Popular Tax Law Provisions

I have not posted to this blog in something over a year, not out of lack of interest, but due to lack of substantive developments to post. The only federal tax-related items we have heard about recently have been non-substantive political rhetoric, “full of sound and fury, signifying nothing.” What any candidate says he or she will do is meaningless. It is a matter of what he or she can get through a very divided Congress. In 2012, that was nothing! Now that the election is over and we are facing a “fiscal cliff” there may be real hope for meaningful dialog and compromise, if not in the waning months of 2011, then shortly after the newly elected members of Congress are seated in January. I disagree with the president, however, when he says he has a “mandate” to raise taxes on the highest income taxpayers.

Before addressing changes as they occur, I want to set the stage in a series of short posts as to where we are now and what will occur if Congress fails to act quickly. Then as truly substantive developments occur, I will update this blog with those changes.

In this first post, I will address those tax provisions that actually expired at the end of 2011 and are not currently available for 2012. I do this because there is at least some possibility that the “lame duck” Congress may decide to retroactively extend some or all of these provisions before the end of the year.

  • Congress routinely passes a provision (usually retroactive) to bring the Alternative Minimum Tax exemption up to an inflation-adjusted amount. This has not been done so far for 2012. Completely overhauling the AMT system is a must, but will not occur until there is a really comprehensive reform of the Internal Revenue Code. Until that happens, we will have to be satisfied with year-to-year “patches” to the AMT exemption amount. Failure to patch it for 2012 and 2013 will impose significant tax increases to millions of Americans, regardless of their tax bracket. Look for this to be done in the coming weeks.
  • The “above the line” deduction for tuition and related expenses of $2,000 or $4,000 (depending on adjusted gross income). With renewed White House emphasis on funding education, this might be reinstated for 2012 and future years.
  • Like the tuition deduction, the “above the line” $250 deduction for kindergarten-12th grade educations expired in 2011. This, too, may be reinstated.
  • Personal tax credits were allowed against the regular tax but not the alternative minimum tax in 2011. This could be reinstated.
  • The deduction for state and local general sales taxes (in lieu of state and local income taxes) also expired in 2011. This, too, could be reinstated.
  • The tax-free distribution for those over age 70-1/2 from their IRAs for charitable purposes ($100,000 maximum) expired in 2011. This is a very popular provision and has much support from the charitable community.
  • The S corporation built-in-gain recognition period is ten years for 2012. It was five years in 2011 and seven years 2009 and 2010. I don’t have a feel yet to whether this will be extended beyond 2012.
  • The basis adjustment to stock of S corporations making charitable contributions of property is the fair market value of the property contributed for 2012. In 2011, the value of the contribution was reduced by the basis of the property contributed, but that provision also expired in 2011. No word on whether this will be extended beyond 2012.
  • The Schedule A residential interest deduction for personal mortgage insurance premiums paid expired in 2011.
  • Many of the energy efficient provisions have expired including the 10% credit on energy efficient improvements (non-business energy property), 10% credit on plug in vehicles, the credit for new energy efficient homes, and the credit for energy efficient appliances.
  • The 20% tax credit for business research and development expenses expired in 2011. This has a lot of support for reinstatement.
  • The expanded Work Opportunity Tax Credit for hiring veterans expired in 2011. This easily could be reinstated to facilitate hiring.

As Congress really gets down to business in the next few weeks, we’ll see which of these provisions are extended. It’s unlikely they will be made permanent at this point, but I’ll be look for Congressional action and post new developments as they occur.


Copyright 2012 Ronnie C. McClure, PhD, CPA

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2012 Tax Adjustments Due to Inflation

The Internal Revenue Service announced today the tax benefits that will be adjusted for inflation in 2012. Details on these inflation adjustments are in Revenue Procedure 2011-52 which will be published in Internal Revenue Bulletin 2011-45 on November 7, 2011. The Service announced these adjustments in IR-2011-104 which I have summarized below:

Exemptions, Deductions, and Individual Tax Brackets

The value of each personal and dependent exemption, available to most taxpayers, will be $3,800, up $100 from 2011.

The new standard deduction will be $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. The Service said that nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket will be $70,700, up from $69,000 in 2011.

For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.

The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out will be $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.

For 2012, annual deductible amounts for Medical Savings Accounts (MSAs) increased from the tax year 2011 amounts. See the table below:

Medical Savings Accounts (MSAs)

Self-only coverage

Family coverage

Minimum annual deductible



Maximum annual deductible



Maximum annual out-of-pocket expenses



The $2,500 maximum deduction for interest paid on student loans will begin to phase out for a married taxpayers filing a joint returns at $125,000 and will phase out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges will remain at the 2011 levels

Estate and Gift Exclusions

For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount will be $5,120,000, up from $5,000,000 for calendar year 2011. If the executor chooses to use the special use valuation method for qualified real property for a 2012 estate, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011.

The annual exclusion for gifts will remain at $13,000.

After I have reviewed the complete Revenue Procedure, I may post additional items that will be adjusted. In these taxing times, we’ll take all of the benefits we can get!


Copyright 2011, Ronnie C. McClure, PhD, CPA

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IRS Releases Form 8939

The Internal Revenue Service last week released Form 8939 (Allocation of Increase in Basis for Property Acquired From a Decedent) and the related instructions. This form and the circumstances surrounding its release were discussed in my posts of September 2 and September 14 below.

As you will remember, the estate tax was to have been repealed for individuals dying in 2010, and the rules allowing a step-up in basis for property acquired from a decedent were to have been replaced with a modified carryover basis regime. The 2010 Tax Relief Act restored the estate tax for individuals dying in 2010 with a $5 million per-person exemption and a maximum rate of 35%. The Act also repealed the modified carryover basis rules for property acquired from a decedent who died in 2010. However, the Act allows estates of individuals dying in 2010 to elect zero estate tax and the modified carryover basis rules that would have applied before they were repealed. The newly released Form 8939 is the vehicle executors use to elect zero estate tax, the modified carryover basis rules, and to allocate a basis increase to certain property acquired from a decedent. This form is due to be filed not later than January 17, 2012. There are no extensions to this date. There are only a few limited circumstances where Service will accept an amended Form 8939. One circumstance is to allocate Spousal Property Basis Increase but only if certain requirements are met, as detailed in the instructions.

Even though an executor may elect out of the estate tax, the generation-skipping transfer (GST) tax provisions continue to apply. The Act, however, provides that the applicable tax rate for each GST occurring during 2010 is zero.

This law, applicable only to estates of decedents dying in 2010, allows the executor to allocate additional basis (Basis Increase) to increase the basis of certain assets that both are acquired from the decedent and are owned by the decedent at death. If the property is acquired from and owned by the decedent, and if the decedent’s basis in the property is less than the property’s fair market value (FMV) on the decedent’s date of death, then the executor generally may allocate Basis Increase to the property, provided that the property’s total basis may not exceed the property’s FMV on the date of death.

The term Basis Increase means the sum of the General Basis Increase (Aggregate Basis Increase and Carryovers/Unrealized Losses Increase) and the Spousal Property Basis Increase. The Aggregate Basis Increase is limited to $1.3 million. In the case of any estate, the aggregate Spousal Property Basis Increase is limited to $3 million. Therefore, the total basis increase allowable is $4.3 million if an estate elects the “no estate tax option” for 2010.

The election is made by filing a timely Form 8939. Generally, once the executor has made the election, it is irrevocable. However, the executor can revoke such an election on a subsequent Form 8939 filed before the due date. Generally, if the executor makes the election, the executor must report all the information required by Form 8939 and its instructions about all property acquired from the decedent other than cash. The executor filing Form 8939 must furnish to each beneficiary of the estate a written statement showing the required information with respect to property acquired from the decedent. Schedule A of Form 8939 should be used to provide this information. Schedule R of Form 8939 is used to allocate the GST exemption. Schedule R-1 is used to inform the trustee of certain trusts of the amount of GST exemption allocated to such trusts. Because the GST tax rate for 2010 is zero, these schedules are not used to compute the GST tax.

As before, I continue to caution that before taking any action with regard to these filing requirements, the reader must consult with knowledgeable tax counsel or refer to Notice 2011-76. The information above is provided to acquaint the reader with this additional guidance from the Internal Revenue Service. If you have additional questions concerning filing requirements for 2010 lifetime gifts or testamentary transfers, contact me at 214.957.3366 or via email at [email protected].


Copyright 2011, Ronnie C. McClure, PhD, CPA

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New Guidance on Tax Treatment of Cell Phones

The Internal Revenue Service issued new and favorable guidance today on the tax treatment of cellular telephones or other similar telecommunications equipment (hereinafter collectively “cell phones”) that employers provide to their employees (Notice 2011-72).

The Service has finally recognized that many employers provide their employees with cell phones primarily for noncompensatory business reasons. The value of the business use of an employer-provided cell phone is excludable from an employee’s income as a working condition fringe to the extent that, if the employee paid for the use of the cell phone themselves, such payment would be allowable as a trade or business expense deduction for the employee.

Under this new guidance, an employer will be considered to have provided an employee with a cell phone primarily for noncompensatory business purposes if there are substantial reasons relating to the employer’s business, other than providing compensation to the employee, for providing the employee with a cell phone. Examples of possible substantial noncompensatory business reasons contained in the Notice are: the employer’s need to contact the employee at all times for work-related emergencies, the employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office, and the employee’s need to speak with clients located in other time zones at times outside of the employee’s normal work day. A cell phone provided to promote the morale or good will of an employee, to attract a prospective employee or as a means of furnishing additional compensation to an employee is not provided primarily for noncompensatory business purposes, however.

The Notice provides that, when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the Service will treat the employee’s use of the cell phone for reasons related to the employer’s trade or business as a working condition fringe benefit, the value of which is excludable from the employee’s income. In addition, solely for purposes of determining whether the cell phone constitutes a working condition fringe benefit, the substantiation requirements that the employee would have to meet in order for claim a deduction are deemed to be satisfied. In addition, the Service will treat the value of any personal use of a cell phone provided by the employer primarily for noncompensatory business purposes as excludable from the employee’s income as a de minimis fringe benefit.

The rules of this notice apply to any use of an employer-provided cell phone occurring after December 31, 2009. If you have questions concerning the tax treatment of your employer-provided cell phone, contact me at 214.957.3366 or via email at [email protected].


Copyright 2011, Ronnie C. McClure, PhD, CPA

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