On January 2nd, Congress passed the American Taxpayer Relief Act of 2012, narrowly avoiding the fiscal cliff. The IRS delayed the start of tax season and scrambled to play catch up to the late-hitting changes.
Because of the delay, many of our clients did not receive the information they needed for us to complete their returns. The changes delayed the issuance of 1099s and K-1s. They also affected filers claiming education tax credits or with rental real estate, among others.
The IRS released the last of these forms in early March. This shortened the tax season to less than six weeks. And since some states cannot release their forms until after federal forms are finalized by the IRS, state tax deadlines are even tighter.
The IRS did not extend the filing deadlines for those forms or for the individuals waiting for them. Therefore, we recommended that many of our clients apply for the automatic extension of their filing deadline. Requesting an extension is easy, and it doesn’t make filing the return more complicated or expensive. It grants an automatic six-month deferral of the return filing deadline.
To extend, taxpayers file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, along with any required first-quarter 2013 estimated income tax payments on Form 1040-ES, by April 15th. BWFA’s tax advisors can help clients determine if a separate state extension application form should be filed as well.
Tax Changes: A Summary
The American Taxpayer Relief Act of 2012 affected taxpayers with provisions such as the expiration of the payroll tax holiday and the one-year extension of many business tax breaks. For our clients, there are three big changes:
Individual Tax Rates
Lower Bush-era tax rates became permanent for all taxpayers, except those with taxable income above $400,000 for single filers ($425,000 for head of household, $450,000 for married filing jointly). Those high earners will be taxed at 39.6% on earned income and at 20% for capital gains and dividends.
ATRA officially revived the ‘Pease’ limitation on itemized deductions and the personal exemption phase-out. Thresholds for both increased to $250,000 of taxable income for unmarried taxpayers and $300,000 for married couples and surviving spouses.
Alternative Minimum Tax (AMT)
ATRA increases the AMT exemption amounts for 2012, provides for an annual inflation adjustment to the exemption amounts for subsequent years, and allows nonrefundable personal credits to the full amount of the individual’s regular tax and AMT.
Estate Tax Rates
ATRA sets the maximum federal estate tax rate at 40%, with an annually adjusted exclusion of $5.25 million for estates of those passed away after December 31, 2012. It also makes portability between spouses permanent. This portability makes it possible for a surviving spouse to take adantage of the deceased spouses’s remaining unused exclusion amount.
For each extension, BWFA will analyze whether a tax client needs to make an estimated tax payment. Contact BWFA’s tax team if you have questions about filing for an extension this year.
By Sharolyn Hockey