Taxes on you and your veterinary practice: What's gone, what stayed in the tax battles of 2013
Last year, President Obama signed into law the American Taxpayer Relief Act of 2012. It’s not the comprehensive tax reform many hoped for, but it does contain many significant tax provisions that will reduce massive tax increases scheduled to impact veterinarians.
For most, it’s an extension of tax provisions that already exist. Some provisions are now permanent, whereas in the past Congress was required to renew them on a yearly basis. The Alternative Minimum Tax is a good example of this.
Perhaps most significantly, the Act for 2013 and beyond makes permanent the Bush-era tax rates for all taxpayers, except those with taxable income above $400,000 ($450,000 for married taxpayers and $425,000 for those filing as head of household). A 39.6 percent tax rate will apply for income above these levels.
The maximum tax rate of 15 percent on long-term capital gains and qualified dividends will continue to apply to those with income below the thresholds above. A new 20 percent rate will apply to income that exceeds the thresholds.
The Alternative Minimum Tax rates—expected to affect millions of taxpayers in 2012—has been “patched” permanently, with the maximum exemption amount now being adjusted annually for inflation.
Limitations on itemized deductions and the phaseout of personal exemptions, which were eliminated by the Bush tax cuts, have been revived, although at higher income levels than they would have been if the Act had not been passed. Itemized deductions and personal exemptions will phase out when a taxpayer income is $300,000 for joint filers, $275,000 for those filing as head of households, and $250,000 for single filers.
In addition to individual income taxes, the Act also touches upon estate and gift taxes. The Act provides permanently for a 40 percent maximum estate and gift tax rate.
The Act extended many tax provisions that expired either at the end of 2011 or 2012. Some of the more significant provisions impacting individuals include:
> The American Opportunity Education Tax Credit has been extended through 2017.
> The above-the-line deduction for tuition has been extended through 2013
> The itemized deduction for state and local sales tax has been extended through 2013.
> The $1,000 child tax credit has been made permanent.
> Bush-era enhancements to the adoption credit and the child and dependent care credit have been made permanent.
> The exclusion from income on cancellation of indebtedness on a principal residence has been extended through 2013.
> The above-the-line deduction of up to $250 for teachers’ classroom expenses has been extended through 2013. > The deduction for mortgage insurance premiums has been extended through 2013.
> The $500 maximum lifetime credit for making energy efficiency improvements to existing residences has been extended through 2013.
> The 60-month maximum for deducting student loan interest deduction has been suspended permanently. The income range for phase-out of the deduction is now permanent, and voluntary payments of interest are now deductible.
> The exclusion from income for employer-provided education assistance up to $5,250 has been extended permanently.
The Act also contained provisions impacting many veterinary practices. Some of the more significant provisions are:
> Increased Section 179 limitations for expensing of purchases have been extended through 2013. For 2012 and 2013, the maximum limit is $500,000 with an investment limit of $2 million. Up to $250,000 of the $500,000 limit may be used for qualifying real property. What this means is up to $250,000 of leasehold improvements to non-owned real estate can be immediately expensed in the year of purchase. This works really well for those starting up new practices.
> 50 percent bonus depreciation has been extended through 2013.
> The 15-year recovery period for qualifying leasehold improvements, qualified retail improvements, and qualified restaurant property has been extended through 2013.
> The Work Opportunity Tax Credit for hiring individuals from targeted groups has been extended through 2013.
> The reduced recognition period of five years instead of 10 for S-corporation built-in-gains tax has been extended through 2013.
While this legislation curtailed many of the tax increases that were scheduled to go into effect, it didn’t prevent all of them. Since the beginning of the year, many of you already noticed a decrease in your paychecks. This is because a 2 percent temporary reduction in the Social Security rate for employees expired in 2012 and wasn’t extended by the Act. Medicare surtaxes on earned income and investment income also went into effect in 2013.
Remember, there’s always the possibility of additional future legislation, including significant reforms to the tax code. Provisions that have been made “permanent” only indicate they aren’t scheduled to expire on a certain date. Any or all of these provisions could easily be changed by future legislation and new provisions can be enacted. As always, please consult your tax advisor to determine how you will be affected personally and to learn how you can best take advantage of any of these new provisions.