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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.



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