Tax relief act presents new challenges

Mark Ciaffaglione holds a copy of the new American Tax Relief Act as he explains (in an abbreviated way) how the new codes can affect individuals and small businesses. Photos by Steve Smith.

Although it helped the federal government from going over the much-talked-about “fiscal cliff” at the onset of 2013, the American Tax Relief Act of 2012 presents some new tax challenges for individuals and businesses.

Accountants Theresa Renner and Mark Ciaffaglione from Magdefrau, Renner and Ciaffaglione, LLC held an informational session for members of the Tolland County Chamber of Commerce to make people aware of some of the potential pitfalls and benefits awaiting them this tax season.

“You can't just keep doing business as usual,” Ciaffaglione said, adding that he, Renner, and others at their firm attended a recent workshop on the new tax laws, and that those laws will affect everyone.

Renner said the ATRA 2012 permanently retained the Bush-era tax rates for lower-and-moderate income people and higher rates for higher-income people, but qualified the word “permanently” by saying that means that congress can change those rates, but they don't have a sunset provision as is.

“Right now they are set in stone until Congress changes them,” she said.

Renner said that the highest “ordinary” income tax rate changed from 35-percent to 39.6-percent. That same rate applies to estates and trusts, and does not account for the new healthcare surcharge taxes, which may apply to some.

Capital gains tax rates increased to 20-percent, and unfortunately, married couples get hit harder, as the threshold for a single person is $400,000, but $450,000 for couples. “Logic would say that if it's $400,000, it should be $800,000 for a couple,” Ciaffaglione said. “There's no logical reason. If you're wondering why they are doing this, we honestly can't give you a reason why.”

Personal exemption and itemized deduction phase-outs are reinstated, and Renner said the thresholds are now $250,000 for singles and $300,000 for married couples, although some things like medical expenses and gambling losses may not apply.

Estate taxes are also affected, and Ciaffaglione said that while some people don't think the estate tax applies to them, it does, because when anyone passes away, their estate becomes a “living, breathing, taxable entity.”

“If those assets generate income [above $11,950], they have to pay a tax of 39.6,” he said, adding that the best defense is to consult with an attorney, and get those assets to beneficiaries who are, hopefully, at a lower tax rate.

Gift taxes could also get tricky. Ciaffaglione said his office often gets calls about that, and that while people receiving gifts never have to pay taxes, the giver often does. Splitting that gift among other people, such as family memners, with a threshold of $14,000, a person can give gifts of up to that amount to several people, but cannot give one gift of $30,000 to a person and ask them to divide it among their family members.

Ciaffaglione said that, commonly, parents give a grown child a gift of $50,000 (for example) to buy their first home, and they don't tell their tax expert until it comes time to do taxes early in the following year. “It's after the fact,” he said. “Before you're going to do this for your child or grandchild... please make a phone call before you do anything. Check with a professional to make sure there are no gift tax consequences.”

As a better piece of advice, Ciaffaglione said a smart thing to do for one's child is to start a Roth IRA account for children of college age who are working. “When little Johnny is in his 60s, he's going to have a boat load of money in there, that's going to be completely tax free for them,” he said.

For businesses, the best advice is that they should always give 1099 forms to anyone who does some outside contracting or providing services for more than $600. “It's a question on all business tax returns now,” Renner siad. “It's huge. The IRS is hot to trot. If you didn't do them, and were supposed to, you're going to hear from them.”

“It's hard to play by all of the rules,” Ciaffaglione said, advising that each new rule has a lot of moving parts, and the best advice is to consult an expert.

Ciaffaglione said many of the extensions are also set to expire again, notably, around the time of the mid-term congressional elections.

For more information, visit www.keynotecpas.com.