What Does Missing the “Fiscal Cliff” Mean to You?
In the final days of 2012, everyone was talking about the “fiscal cliff“ and its effect on America’s taxpayers. In the end, Congress passed legislation that sidestepped the fiscal cliff, and President Obama signed what is now the American Taxpayer Relief Act of 2012 (ATRA) on Jan. 2, 2013.
Many of the provisions of the bill received a lot of media coverage, including modifications targeting the wealthiest Americans with higher taxes, permanently fixing the alternative minimum tax, extending other tax provisions, and postponing cuts in Medicare payments to physicians. There were other items that received less press coverage, but are also important to taxpayers. The American Taxpayer Relief Act contains provisions that impact nearly every taxpayer, not just the high earners. Experts from the Pennsylvania Institute of Certified Public Accountants (PICPA) explain:
Marriage penalty relief.
The marriage penalty applies when married taxpayers filing a joint return end up paying more taxes than the sum two individuals would pay earning the same amount of income. For 2012, the marriage penalty was lower than prior years because of tax relief included in the Bush-era tax cuts. If this provision had not been made permanent at year's end, the standard deduction would have decreased in 2013, dropping to $9,900 from $11,900. Married taxpayers filing jointly will get to keep that $2,000 in their pockets.
Child and dependent care rules.
The child and dependent care credit was designed to provide a tax credit to individuals who pay for day care expenses for their children or disabled adult dependents. The permanent extension allows the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one. Without the extension, the credit would have reverted to $2,400 for one dependent or up to $4,800 for more than one.
Adoption credit and adoption assistance.
The ATRA permanently extends the adoption tax credit at $12,650 with an annual adjustment for inflation. It also extends a provision under which a company can provide money to help an employee with an adoption without counting that cash as income. The legislation did not renew an earlier provision covering 2010 and 2011 that allowed lower-income families to claim a refundable adoption tax credit that was larger than their overall federal income tax liability.
Coverdell education savings accounts (ESA).
All of the beneficial changes made with the 2001 Tax Act are now permanent through the ATRA. These include the tax-free use of an education savings account for K-12 expenses; the $2,000 annual contribution limit (it would have reverted to $500); the coordinated use of tax-free ESA distributions in the same year an education tax credit is claimed; and allowing contributions to both an ESA and 529 plan for the same beneficiary in the same year.
Student loan interest deduction.
Qualifying students can deduct some or all interest paid on their student loans. The credit is good for as much as $2,500. There is no longer a five-year limit for claiming this deduction.
An important, but not permanent, extension affecting many families is the Child Tax Credit which was extended for another five years. Each head of household can deduct $1,000 for each qualifying child, as opposed to reverting to the deduction amount of $500.
A CPA Can Help
If you have questions about your specific situation, contact your financial advisor. To find a CPA in Pennsylvania by location or area of expertise, visit www.ineedacpa.org