Tax Press Release-01/12/13
Kenneth Brackett (Ken) with Lighthouse Financial is a licensed Registered Investment Advisor and has clients throughout the country with a focus in Delaware and Pennsylvania and offices in North Wilmington. He has just released the following explanation for the Taxpayer Relief Act of 2012.
The Taxpayer Relief Act of 2012 has given us multiple tax benefits that will really benefit us. One of the most notable changes is the Roth conversion of active 401k plans. This provision was included as a way to help pay for a two-month delay in about $110 billion of domestic spending cuts slated to go into effect on Jan. 1.
Up until this point, 401(k) plan participants could only roll their money into an IRA if one of 3 qualifying events happened: changing jobs, retirement, or reaching age 59 and 1/2. Under the new plan, workers with 401(k)s, 403(b)s and similar defined contribution plans are now able to convert to a Roth IRA at any time. Lawmakers believe that easing restrictions on the conversions will produce federal funds because participants must pay tax on the money when they convert it to a Roth. Of course the benefit of the Roth is that disbursements in retirement are made tax-free.
Another benefit is the permanent capital gains and dividend rate of 20% for households making more than $450,000 and 15% for those below that level; a permanent extension of the alternative minimum tax exemption; and an estate tax rate of 40% with a $5 million individual exemption. This is a huge change as Estates were taxed at a 35% rate with a $5 million exemption in 2012 and were to reset at a 55% rate with a $1 million exemption as of Jan. 1, if the Bush tax cuts expired.
One of the unfavorable changes is the increase in the threshold for claiming the itemized medical expense deduction. Up to this point, all medical expenses that exceeded the 7.5% of Adjusted Gross Income (AGI) threshold, were deductible. That threshold has now been increased to 10%.
The other unfavorable change is the reduction of the standard deduction for those filing “married filing jointly”. Up to this point, the deduction has been 200% of the single deduction. It has now dropped to 167% of the single deduction. This has effectively lowered the deduction from $11,900 to $9,900.
For those making over $200k individual or $250k jointly, there is now a 3.8% tax on investment income.
The new annual gift exclusion is $14k.
The new IRA contribution limit for those under age 50 is $5500 and $6500 for those over 50.
One of the best features is for those who are taking Required Minimum Distributions (RMD). They can now gift to charity directly from their IRA. That gift is not taxable to the IRA owner yet it satisfied the IRS as part of that RMD. This can effectively lower our AGI which can have a positive ripple effect on the social security threshold income (less taxable). It can also possibly lower our tax
bracket, and help with the itemized deduction phase out.
The Taxpayer Relief Act of 2012 has given us multiple tax benefits that will really benefit us. One of the most notable changes is the Roth conversion of active 401k plans. This provision was included as a way to help pay for a two-month delay in about $110 billion of domestic spending cuts slated to go into effect on Jan. 1.
Up until this point, 401(k) plan participants could only roll their money into an IRA if one of 3 qualifying events happened: changing jobs, retirement, or reaching age 59 and 1/2. Under the new plan, workers with 401(k)s, 403(b)s and similar defined contribution plans are now able to convert to a Roth IRA at any time. Lawmakers believe that easing restrictions on the conversions will produce federal funds because participants must pay tax on the money when they convert it to a Roth. Of course the benefit of the Roth is that disbursements in retirement are made tax-free.
Another benefit is the permanent capital gains and dividend rate of 20% for households making more than $450,000 and 15% for those below that level; a permanent extension of the alternative minimum tax exemption; and an estate tax rate of 40% with a $5 million individual exemption. This is a huge change as Estates were taxed at a 35% rate with a $5 million exemption in 2012 and were to reset at a 55% rate with a $1 million exemption as of Jan. 1, if the Bush tax cuts expired.
One of the unfavorable changes is the increase in the threshold for claiming the itemized medical expense deduction. Up to this point, all medical expenses that exceeded the 7.5% of Adjusted Gross Income (AGI) threshold, were deductible. That threshold has now been increased to 10%.
The other unfavorable change is the reduction of the standard deduction for those filing “married filing jointly”. Up to this point, the deduction has been 200% of the single deduction. It has now dropped to 167% of the single deduction. This has effectively lowered the deduction from $11,900 to $9,900.
For those making over $200k individual or $250k jointly, there is now a 3.8% tax on investment income.
The new annual gift exclusion is $14k.
The new IRA contribution limit for those under age 50 is $5500 and $6500 for those over 50.
One of the best features is for those who are taking Required Minimum Distributions (RMD). They can now gift to charity directly from their IRA. That gift is not taxable to the IRA owner yet it satisfied the IRS as part of that RMD. This can effectively lower our AGI which can have a positive ripple effect on the social security threshold income (less taxable). It can also possibly lower our tax
bracket, and help with the itemized deduction phase out.
