3.8% Net Investment Income Tax

This is a new tax for 2013 on the lesser of net investment income or the amount that adjusted gross income exceeds $250,000 for joint returns or $200,000 for single returns. For example, a couple filing jointly having net investment income of $100,000 and adjusted gross income of $300,000 would pay a tax of $1,900($300,000-$250,000 x .038) since the excess adjusted gross income of $50,000 is less than the net investment income of $100,000. The tax is computed on new form 8960. Net investment income includes taxable interest, ordinary dividends, royalties, net gains from the sales of stocks, securities and investment real estate, rental income, and passive income reduced by allocable deductions such as investment interest expense, brokerage fees, and rental expenses.

Required Minimum Distributions (RMDs)

When  taxpayers reach age 70 1/2, they are required to withdraw an RMD from their retirement plans except for Roth IRAs. The RMD is calculated by dividing the account balance at the end of the prior calendar year by the distribution period on the uniform lifetime table for the owner's age. For example, the distribution period for age 70 is 27.4. If the balance in the retirement account is $100,000, then the RMD is $3,650 ($100,000/27.4). Usually the broker will remind the taxpayer of the RMD amount and ask when you want to withdraw the amount. There is a 50% penalty on an RMD that is not timely withdrawn. The government is trying to encourage you to spend the money on your own retirement and not leave it to your children.

Section 179 Depreciation

For 2013, the max section 179 depreciation is $139,000. To qualify, the property must be used over 50% in a trade or business and not be purchased from a related party. The property can be used. Most rental property doesn't qualify and vehicles are generally subject to a lower limit of $25,000. Trucks and vans (loaded) over 14,000 pounds are eligible for the full $139,000. Qualifying property consists of equipment, furniture, and computers. Non qualifying property includes buildings and their components, fences, air conditioning units, landscaping, and property acquired by gift, inheritance or trade. The section 179 deduction is also limited by the total taxable income from all of the taxpayer's businesses. If the deduction is limited because of the taxable income limitation, the excess can be carried forward to future years until utilized.

High Deductible Health Insurance

To be eligible for a health savings account, you have to have  high deductible health insurance and the deductible limits change every year. For 2013 and 2014, the annual deductible can't be less than $1,250 for individual coverage and $2,500 for family coverage. The maximum annual deductible can't exceed $6,250 for individuals ($6,350 for 2014) and $12,500 for families ($12,700 for 2014). A high deductible health insurance policy can however have a zero deductible for preventive care. The maximum deductible only applies to the network of participating providers.

Vacation Home Expenses

Your deductible expenses are limited if you both use your home for personal use and rent it out. Expenses are deducted in a certain order. Qualified mortgage interest as a second home and real estate taxes are not limited. They are deducted either on the rental schedule for the rental portion or the personal use portion is deducted on schedule A under itemized deductions. Any operating expenses directly related to the rental activity such as management fees or advertising are deducted on the rental schedule. The rental portion of all other indirect expenses such as maintenance, insurance, and depreciation can then be deducted on the rental schedule per days rented to total days occupied . The personal use portion is nondeductible. If your personal use generally exceeds 14 days, then you cannot create a deductible loss from the property. Unused rental expenses can be carried forward to later years. Any day rented to anyone at less than fair rental price is a personal use day and any day rented to family unless it is their main home is a personal use day. If you spend most of the day working on the property, then that day is not counted as a personal use day. An important point to remember is that just one day of personal use triggers the vacation home limitations on deductions.

Top Ten Ways to Reduce Taxes Right Now

You still have some time in 2013 to take steps that will beneficially affect your tax return. Here are my top ten.
1. Clean out your closet and basement and make donations to Goodwill. Keep the receipts and a record of items donated. You can value the items using the valuation guide at salvationarmyusa.org.
2. Organize your 2013 tax documents and receipts for deductions in one file folder for the year. Summarize the receipts and fill out the tax organizer.
3. If you have a business on the cash basis, delay mailing bills until late December so that payments won't be received until 2014.
4. Donate appreciated stock to charities.
5. Write a check to your favorite charity.
6. Invest in Georgia muni bonds. The interest is tax free.
7. Sell investments that will generate losses to offset any capital gains plus $3,000.
8. Buy supplies and  equipment for your business before yearend.
9. Estimate your volunteer work mileage for the year.
10. Increase your retirement plan contributions to the max.

A Medicare Plan

To get the most comprehensive coverage under Medicare which is available to those turning 65, you should consider signing up for both Medicare premium supplemental plan F and part D prescription drug coverage. This coverage costs about $200 more per month and is in addition to the required part B costs. Medicare supplemental plans reduce the out of pocket costs in co-pays and deductibles.

Some Bad Things Coming

When you file your 2013 tax return there may be some unhappy surprises for some of you. There are 4 major tax increases related to Obamacare funding and 2 high income tax rate increases which affect 2013. The 4 Obamacare tax increases are the .9% Medicare tax on earned income, the 3.8% tax on investment income (interest, dividends, capital gains, rents, and passive income), personal exemption phase out, and itemized deduction phase out of up to 80%. The 2 high income tax increases are the new 39.6% rate and the 20% capital gain rate which affect taxable income of $400,000 single and $450,000 joint. The 3.8% and the .9% tax kick in at $200,000/$250,000 adjusted gross income single and joint. The phase outs of itemized deductions and exemptions start at the $250,000/$300,000 adjusted gross income single and joint. Note that the 4 Obamacare taxes are based on adjusted gross income where the 2 high income tax changes are based on the more favorable taxable income. Note also the marriage penalty built into the new thresholds. The joint threshold isn't even close to being double the single threshold. You may want to check your tax withholding before year end to see if you are withholding enough to cover these new taxes.

Bonus Depreciation

You can still deduct 50% of the cost of business property added before 12/31/2013. To qualify the property must be new and have a recovery period of 20 years or less. Business vehicles still have depreciation limits so you don't get the 50%, but you do get an additional $8,000 bonus depreciation in the first year.

Top Ten IRS Red Flags

The overall IRS audit rate is around 1% for individuals. The following 10 items can kick up that percentage and bring you some IRS attention:

1. Reporting income over $200,000.
2. A schedule C with a net loss.
3. Office in the home deduction with business percentage over 20%
4. Claiming 100% business use of a car.
5. Rental real estate loss
6. Large fluctuation of income from prior year
7. Foreign bank account
8. Income on return doesn't match 1099
9. Meals and entertainment deductions
10. Larger itemized deductions than average for your income level

Most Important Job of an Executor

The most important job of an executor is to find all of the relevant documents of the deceased which can be very difficult depending on the size of the estate. To help your future executor and heirs, you may want to consider writing a letter now detailing your post death instructions, and describing the location of all of your important papers. The records your executor should find as quickly as possible after death include the following: cash on hand, bank account statements, auto titles, brokerage statements, retirement plan statements, insurance policies, list of user Id's and passwords for access to your financial accounts, safe deposit box inventory of items, prior gift tax returns, last three years of Federal and state income tax returns, latest credit card statements, any jewelry or art appraisals, mortgages and deeds to real property, stock or bond certificates registered to deceased, and any current shareholder, operating, or partnership agreements. I also recommend that all stock and bonds be held in street name instead of personally which means that a stock broker will keep up with the securities.

Premium on Bonds

If you pay a higher price for a bond than what it is worth at maturity because the bond pays a higher rate of interest than the current market, then you have the option of reducing your yearly interest income by the amortization of the premium or increasing your basis in the bond when it matures which reduces your capital gain or increases your capital loss. Some brokers provide a schedule of bond accretion or amortization to help you with this process and also calculate the adjusted bond basis in the schedule of realized gains and losses. Usually it is much easier and not really worth it to consider bond amortization and just leave the premium in your basis in the bond.

Georgia Film Tax Credit Part 2

Last week I discussed the GA film tax credit and how you can buy these credits at a discount. There was a private letter ruling 200951024 by the IRS on 12/18/2009 that indicated that the discount amount has to be recognized as a capital gain on your tax return. For example, in my situation I received a credit of $1,130 on my 2012 GA return at a cost of $1,000 paid in 2013. On my 2013 tax return,  I have to show the $130 as a short term capital gain.

Georgia Film Tax Credit

In 2008, Georgia passed a law authorizing film production companies the right to credits against their tax liability or to sell those credits to any GA taxpayer in order to induce them to film in GA. There is a market for the credits which sell at a discount and are sold to the public by various private companies. I did it myself on my 2012 tax return receiving a $1,130 credit for $1,000. There is no maximum on the amount of credits you can buy. All you have to do on your tax return is list the company you purchased the credit from, the amount of the credit, the Federal ID number, and use code 122 on page 5 of GA form 500. Tax credits can be carried forward for 5 years if you can't use all of them in one year.

What a Will Doesn't Do

A will does many good things like naming a guardian for minors and naming an executor for your estate along with telling who you want your assets to go to. If you die without a will, then the distribution of your probate assets is determined by the state which may not be what you want. In general probate assets are assets you hold in your own name rather than jointly and where there are no designated beneficiaries like  a 401k plan. To transfer these assets to another person they have to go through a probate which involves  a court process. A will cannot govern the transfer of non probate assets like retirement plans which is determined by the named beneficiary. That is why it is so important to review your beneficiaries after changes in your life like divorce.  A will cannot disinherit a surviving spouse but can disinherit adult children, and finally you cannot avoid probate by having a will.

History of the US Income Tax

Our modern income tax goes back 100 years to the ratification of the 16th amendment on February 3, 1913 by 3/4s of the states. The amendment was passed by Congress on July 2, 1909 during the height of the progressive movement. The first form 1040 for 1913 was due March 1, 1914 for the period March 1 to December 31 of the previous year. The highest rate on taxable income was 6% on amounts over $500,000. For the first $50,000 of taxable income, the rate was 1%. Single filers had an exemption of $3,000 and joint filers had an exemption of $4,000 so probably 90% of income earners in the US paid no income tax at all. What amazes me is that the income tax was really just on the very wealthy if you factor in inflation and also at a very low rate as compared to today. The exemption of $4,000 in 2013 dollars would be $94,400 (2259.6% rate of inflation). The 1% rate applied to the first $1,180,000 in taxable income after converting $50,000 to today's dollars which means that 99.99% of taxpayers paid at the top rate of 1%  in 1913. I say let's go back to the 1913 rates and exemptions.

Master Limited Partnerships Held in Retirement Accounts

What do you do if you get a K-1 from a master limited partnership (MLP) and the owner is your IRA or another retirement account? Your IRA would even have its own Federal ID #. The correct thing to do is to provide this form to the plan custodian as your IRA owes any potential  tax and not you personally. Any business income over $1,000 from a MLP is subject to unrelated business tax of 35% even if owned by a tax exempt entity such as your IRA. Passive investment income such as dividends and interest earned by a MLP are not subject to the unrelated business tax.

Medical Deductions

Certain expenses such as dancing lessons, swimming lessons, health club dues, spa dues, vitamins, diaper service, teeth whitening, marijuana, nonprescription nicotine and gum, and food purchased per  a weight loss program are generally not deductible even if recommended by a doctor. To be deductible, expenses must be for the diagnosis, cure, mitigation, treatment or prevention of disease or affecting any structure or function of the body. Expenses to improve general health are not deductible.

Document Your Tax Deductions

If you are audited by the IRS, it is up to you to prove that you had a valid deduction. How do you do that? You need to keep invoices and bills that you pay. I attach the voucher part of my checks to the paid invoice which shows the date of the check and check number. If you don't have computer checks, write the check number and date on the invoice and keep them in a folder for the current year and at least the prior 3 years. Keep all of your business credit card statements that detail what you were charged. Write on the statement the names and relationships of anyone you paid a meal for. Keep all of your bank statements as the charges from debit cards can document business expenses. Pay the bank to provide check images each month if possible. It is worth the extra money. Going back and trying to get check images from banks several years old is very difficult and expensive and sometimes impossible. Also don't pay tax deductible bills with cash. Use checks.

Tips on Calling the IRS

If you need to talk to an IRS agent, you can call 800-829-1040 which is the tax help line. Give yourself about 45 minutes to be on hold so have a good book nearby to pass the time. Once you get an agent, I have found them for the most part to be very courteous, professional, and eager to help. Don't call on Mondays or Fridays as those are usually busier days for them. If you want your CPA to handle a matter with the IRS, usually the CPA needs to get a signed power of attorney form from you before the IRS will talk to him or her.

Required Minimum Distributions(RMD) for a Roth IRA?

One of the really good things about a Roth is that RMD's don't apply except for one big exception. If a non spouse beneficiary inherits a Roth IRA, then they are subject to the RMD rules and have to distribute the benefit over their life expectancy. A surviving spouse can elect to roll over the Roth to their own Roth.

Social Security Benefits before Full Retirement Age

If you choose to sign up for social security before your full retirement age (FRA) which is age 66 for those born between 1943 and 1954, your benefit will be reduced if your earned income (wages and self employment income) exceed certain amounts. The amounts for 2013 are $15,120 for years prior to the year you reach FRA and $40,080 in the year you reach FRA. The earnings limit can change every year. There is no limit to what you can earn after the month you reach FRA. Benefits are reduced $1 for every $2 you earned over the $15,120 and $1 for every $3 earned over the $40,080. This is a good reason not to take social security before your FRA.

What Medicare Doesn't Cover

Many people think medicare covers all medical expenses once you turn 65. Unfortunately, there are some very large costs that are not covered at all like nursing home care after 100 days. Also medicare does not cover hearing aids, dental care, eyeglasses,  routine foot care, and 35% of outpatient mental health care.  One thing that medicare does pay 100% for is hospice care for as long as the doctor certifies that it is necessary for the terminally ill.

IRS Installment Agreement

If you can't pay your Federal taxes, you have an option of requesting an installment agreement by filing form 9465. On the form, you promise to pay a fixed amount on a certain day each month. The IRS prefers that you set up a direct debit to your bank account each month and encourage you to do so by discounting the regular one time user fee of $105 to $52 if you choose the direct debit option. Interest of 3%(current Federal rate) and late payment penalties of .5% (25% max) continue to apply until the taxes are paid. I usually encourage clients in this situation to pay as much as they can when they can to maintain more flexibility and not be tied down to a fixed payment.

The Best Kind of Income: Nontaxable

Other than free coffee provided by your employer, what are some other nontaxable items out there? Some of the most common include: municipal bond interest, non cash gifts from your employer of small value like a holiday turkey, gifts from family, inheritances in most states, life insurance proceeds,  lawsuit awards for physical injury or sickness, and up to $5,250 of qualified educational assistance from your employer.  Inheritances are all tax free from Federal taxes but some states tax inheritances above a certain amount.

What Type of Business Entity Should I Choose?

You want to work for yourself and you have a great idea for a business. The next step is to determine what type of entity to be; proprietorship, limited liability company (LLC), S corporation, partnership, or C corporation. The order of the 5 entities goes from simple to complex with the C corporation the most complex and the proprietorship the easiest to set up and operate. I prefer the proprietorship for most small one owner companies but there are advantages and disadvantages to each of the entities and expert advice should be sought to find the best fit for your new business.

Simplified Employee Pensions (SEPs)

In my opinion, SEPs are the best way to put aside funds for retirement for the self employed with no employees. You can contribute up to 20% of your net self employment income to a maximum of $51,000 in 2013 to your SEP by the extended due date of the tax return. This contribution is tax deductible and grows tax free. There is also no reporting requirement like there is for other more complex retirement plans like 401k plans. You don't even have to establish a plan until the extended return due date.  If you have employees, then you have to make the same percentage contributions for all eligible employees.

Mortgage Interest on Three Homes

Mortgage interest paid on your first and second home is deductible if generally the combined debt is less than $1,100,000. What if you have a third home? If it is not considered investment property, then the interest is nondeductible personal interest. If the third home is held for investment, then the interest is investment interest which is only deductible to the extent of investment income each year.

Social Security Benefit

For 2013, the most social security you can receive is $40,200. You have to start getting benefits at age 70 to get the maximum. The average social security benefit is $14,760. Benefits are based on the age you start receiving benefits and earned income for your best 35 years of work.

Club Dues

The IRS says no deduction if the principal purpose is to provide entertainment. Dues paid to country clubs, athletic clubs, airline and lunch clubs would never be deductible. Dues paid to  public service organizations like  Rotary are in a different category and are deductible.  If you take a business client to dinner or golf at your country club, the cost of the meal and golf would be 50% deductible.

The Best Tax Shelter

You can exclude up to $500,000 of gain in the sale of your personal residence from your taxable income if you file jointly. You can exclude half of that if you are single. This is one of the best tax deals around, and would be even better if the real estate market was more robust and taxpayers were sitting on these kind of gains like many were before 2008. What are the requirements for this good deal? They're not too bad. You can only do it once every 2 years. You have to have owned and used the property as your principal residence for 2 out of the 5 years prior to the sales date. So is it time to start packing boxes and get that tax free income?

I received a letter from the IRS. What do I do?

The first thing to do is not to panic. Many notices can be cleared up with a simple phone call or submission of some documents. Many times the IRS is wrong in their calculations or there is a misunderstanding. You need to be responsive by contacting the IRS on a timely basis. Usually you have 30 days from the date of the notice. They take it as a sign of disrespect if they don't hear from you. I recommend that you give the notice to your CPA to handle.

Regular IRA vs Roth IRA

The three main differences between a Roth and a regular IRA are the following: 1. You get a tax deduction for a regular IRA contribution but not for a Roth contribution. 2. You have to stop making regular IRA contributions at age 70 and 1/2 but there is no age restriction on Roth contributions. 3. You have to start to take distributions out of your regular IRA after age 70 and 1/2 but there is no such requirement for a Roth. Which is better? It all depends on your priorities.

Georgia Section 529 Plan

You can contribute up to $2,000 per child for college to a section 529 Georgia plan and take a deduction on your Georgia tax return. You don't get a Federal deduction but the funds grow tax free. You can contribute to any other state's 529 plan too, but you won't get the GA deduction then. You deduct the amounts on schedule 1 line 8 on the GA return for  Georgia higher education savings plan.

Publicly Traded Partnerships (PTPs)

Your broker may invest in a PTP for you which are subject to the passive activity rules which can limit the deduction of losses. PTPs are even under more restrictive rules concerning the deductibility of losses. You can only deduct losses against future income from that specific PTP and not against other PTPs or other  passive income. If you sell the PTP in a taxable transaction, then you can deduct all suspended losses.

Child Care Credit

You can get $1,200 in a tax credit if you have at least $6,000 in qualifying expenses and two qualifying children ( generally under age 13). The following expenses qualify: preschool for children under the level of kindergarten, before or after school care for those children in kindergarten and higher grades, day camp costs, and  babysitting fees. Overnight camp does not qualify. In order to get the credit, you have to provide the name, address, and Federal identification number of all child care providers on your tax return.

2013 Personal Exemption Limitation

You are allowed a $3,900 exemption for yourself, your spouse, and any dependents on the 2013 tax return. However if your adjusted gross income(AGI) is over $250,000(single) or $300,000(joint) then your exemption is reduced by 2% on each $2,500 above the $250,000 and $300,000 thresholds. For example, a married couple with an AGI of $400,000 would see a reduction of their personal exemption of $7,800(3900*2) of $2,000 to $5,800 (.02*2500*100,000/2500=2000).

2013 Itemized Deductions Limitation

You can thank Donald Pease democratic congressman from Ohio for this nice little haircut in your deductions who originally sponsored this legislation. If your adjusted gross income(AGI) exceeds $250,000 (single) or $300,000 (joint), you have to reduce your itemized deductions by 3% of the excess AGI over those amounts. These thresholds will be adjusted for inflation after 2013. All itemized deductions are affected except casualty losses, gambling losses, investment interest, and medical expenses which are not reduced. You also cannot lose more than 80% of the itemized deductions which are affected such as charitable contributions, state and local taxes, mortgage interest, and miscellaneous. For example, a couple with an adjusted gross income of $745,000 would lose $13,350 in itemized deductions based on the following calculation: $745,000-$300,000 x 3% = $13,350.

Self Employment Tax

Self employment tax of 15.3% is imposed on the net profit from all trades and businesses. It can apply to sole proprietors, partners, and members in an LLC. This tax is in addition to income tax and is meant to cover both the employer and employee portions of social security and medicare for the self employed. This can come as a shock to those who quit their W2 job and start their own business. They may have no taxable income but yet still owe tax if they had a net profit on their new business.

Late Filing Penalty

This is a penalty that will  put the hurt on you because the IRS really, really wants you to send in that tax return. They impose a penalty of 5% of the unpaid balance each month that the tax return is late up to a maximum of 25%. An extension can get you another 6 months to file the individual return, but you better send it in by that extended due date of October 15 to avoid the penalty. If you have never had a tax penalty before including a late payment penalty, you will probably be able to get a waiver of the penalty by the IRS. If you have other penalties but never a late filing penalty, you may be able to get 25% of the penalty waived. Even if you can't make any payments on the amount due on your tax return, it is much better for you to send in the return to avoid this punishing penalty.

Roth Conversions and the 5 Year Rule

If you convert your regular IRA into a Roth IRA, you can't take a distribution from the Roth for five years without a 10% penalty unless you meet some specific exceptions. After five years, you can withdraw the conversion amount, but not any earnings penalty free even if you are under age 59 1/2. Each conversion amount is subject to its own five year period.

Top Five Ways to Help Your Tax Preparer

The 2012 tax return filing season is upon us and if you would like to make it easier on your busy tax preparer, please consider the following top 5 ways you can help.

5. Use email to respond to questions from your tax preparer or to ask tax questions. This is an efficient way to communicate and saves time for both of us. Mail or drop off your tax work. Usually if you are a longtime client with no significant changes, there is no need for an office appointment.

4. Provide annual totals of amounts for the year. For example add up all your medical bills for the year and give the preparer the total only. You don't want the preparer spending time adding up individual receipts.

3. Don't provide receipts for expenses. Put just the amounts in a worksheet or on an organizer and total them.

2. Answer the tax preparer as soon as possible when you get follow up questions so that your tax return can be completed promptly.

1. The number one way you can help your tax preparer is to fill out the tax organizer as completely as possible and provide all tax information forms that are reported to the IRS such as 1099s.

Thank you.

Death and Taxes by State

Federal estate tax now only kicks in if the individual's estate exceeds $5.25 million which exempts most estates from the death tax. This is also true in 29 states including Georgia that have no state estate or inheritance taxes. Maryland and New Jersey get the prize because they impose both an estate tax and inheritance tax. Wealthy taxpayers there need to move before they die. Six states only impose an inheritance tax. Generally, inheritance taxes are levied on  recipients who are not direct relatives. For example, Maryland charges a 10% inheritance tax on all money paid to a niece, nephew, friend or other unrelated person, but none to children, grandchildren or spouse.  19 other states and the District of Columbia have an estate tax that generally starts after a $1 million exemption and a top rate of 16%. Illinois is the most recent state to impose an estate tax with a $4 million exemption effective 1/1/2013.

Georgia's New Car Tax

All cars bought on or after 3/1/2013 will be exempt from sales tax and the annual ad valorem tax. Instead you will pay a one-time 6.5% title ad valorem tax based on the value of the vehicle. The rate goes up to 6.75% in 2014 and 7% in 2015. It can never go above 9% per statute. You also can opt into the new law if you bought a vehicle 1/1/2012 through 2/28/2013 by paying any difference if any between what you've already paid in sales tax and ad valorem tax and the new 6.5% rate beginning 3/1/2013. There is a calculator on the GA Dept of Revenue website that can help you decide. You have until 1/1/2014 to decide whether to opt in to the new tax. I believe it will be advantageous for those eligible to opt in since most county sales tax rates alone exceed 6.5%. This new tax does not appear to be deductible as personal property tax since it is not charged on an annual basis so that is one downside. Overall this is a great deal for Georgia's taxpayers.

New Simplified Home Office Deduction

Starting with the 2013 tax return, taxpayers with home based businesses can take a simple approach to determining this deduction. All you have to do is multiply the business square footage by $5 a square foot and that is your deduction. The amount you can take maxes out at $1,500 a year so if there is more than 300 square feet this method might not be beneficial. You can still claim 100% of the mortgage interest and real estate tax as itemized deductions but no depreciation is allowed. The IRS estimates that his will save taxpayers 1.6 million hours a year. See Revenue Procedure 2013-13 for more details.

Georgia Retirement Income Exclusion

The Georgia retirement income exclusion has been increased to $65,000 for those 65 and older for 2012 from $35,000 in 2011. For those aged 62 through 64, the  maximum exclusion remains at $35,000. Earned income such as wages has a separate limit of $4,000. This exclusion is also available to those less than 62 if they are permanently disabled and thus can't work. Social security is not included in the exclusion since it is not taxable at all by Georgia.

Social Security Changes for 2013

Monthly social security benefits increased 1.7% in 2013 due to the cost of living adjustment. This increase affects nearly 62 million Americans. The amount of earnings subject to the social security tax also increased to $113,700 from $110,100 which increases the tax for an estimated 10 million taxpayers. If you are under the full retirement age and drawing social security, you can still get full benefits if you earn (W2 and self employment income) less than $15,120 in 2013 which is up from $14,640 in 2012.

Top 10 Things You need to Know About the New Tax Law

The American Taxpayer Relief Act of 2012 enacted this month contains 164 pages of tax law changes. Below are the top ten changes that will affect taxpayers:

1. The top marginal rate increased to 39.6% from 35% for single taxpayers making over $400,000 and married taxpayers making over $450,000 effective 1/1/2013.
2.  The rate for long term capital gains and qualified dividends increased from 15% to 20% effective 1/1/2013 for only those taxpayers in the top marginal bracket.
3. The 2% reduction in social security payroll taxes expired 12/31/12.
4. The maximum estate and gift tax rate increased from 35% to 40% and the exclusion remained at $5 million adjusted for inflation effective 1/1/2013. The estimated amount for 2013 is $5,220,000.
5. The individual alternative minimum tax exemption was permantly increased and indexed for inflation beginning with 2012. This will prevent millions of taxpayers from being exposed to this tax.
6. The option to deduct sales tax instead of state and local income tax which expired at the end of 2011 has been extended through 2013.
7. Itemized deductions will be limited for higher income taxpayers with adjustd gross income(AGI) over $200,000 for singles and $250,000 for joint filers. The reduction is equal to 3% of the AGI over the thresholds. This is effective 1/1/2013. This law had been phased out 1/1/2010.
8. Taxpayers will also lose part of their personal exemptions effective 1/1/2013 if their AGI is above the $200,000/$250,000 amounts. This law had been phased out 1/1/2010.
9. The credit for energy efficient home improvements of $500 which expired at the end of 2011 has been extended through 2013.
10. 50% bonus depreciation for qualifying property which expired at the end of 2012 has been extended through 2013. The property has to be new property.