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The American Taxpayer Relief Act: What it means to your wallet
In the days leading up to the end of 2012, all eyes were on the fiscal cliff. Would Congress vote to avert it? If not, what would that mean to America’s taxpayers?
In the end, Congress did pass the fiscal cliff legislation, and President Obama signed what is now the American Taxpayer Relief Act of 2012 into law on Jan. 2, 2013, preserving most of the George W. Bush-era tax cuts and extending many other lapsed provisions.
While 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 and more — there are some items that were not in the spotlight but are also important to taxpayers. According to the Minnesota Society of Certified Public Accountants, the ATRA contains provisions that impact nearly every taxpayer, not just the high earners. Don’t miss out on some now permanent deductions that could help lower your tax liability. Here’s a rundown of some of the permanent extensions that may impact you:
Marriage penalty relief. The marriage penalty applied when married taxpayers filing a joint return paid more taxes than the sum two single 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. Because of ATRA, married taxpayers filing jointly and taking the standard deduction will continue to protect that extra $2,000 from being taxed.
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 legislation permanently extends the adoption tax credit at $12,650 with an annual adjustment for inflation. It also extended a provision under which a company can provide money to help an employee with an adoption, without counting that cash as income. Note: 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. All of the beneficial changes made with the 2001 Tax Act are now permanent through the ATRA.
• Tax-free use of an education savings account for K-12 expenses $2,000 annual contribution limit (it would have reverted to $500)
• Coordinated use of tax-free ESA distributions in the same year an education tax credit is claimed.
• Allowing contributions to both an ESA and to a 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.
Child Tax Credit. Important to many families is the Child Tax Credit. Here’s what the ATRA makes permanent:
• The increase in the per-child amount from $500 to $1,000, not indexed for inflation.
• The additional CTC, which provides for the credit to be refundable up to 15 percent of earned income in excess of $10,000 (indexed for inflation after 2001).
• Allows the CTC, regardless of a taxpayer’s tentative alternative minimum tax.
A CPA can help
A CPA can help you determine which deductions apply to you and which don’t, helping you keep more of your money in your wallet. If you have questions about your taxes or other personal financial planning topics, be sure to contact your local CPA.
Need help finding a CPA?
Visit mncpa.org/referral to locate one in your area or go to mncpa.org for more financial planning advice and tips.
The Minnesota Society of Certified Public Accountants serves the public interest by advancing the highest standards of ethics and practice within the CPA profession.