The American Taxpayer Relief Act averts the United States’ descent over the “fiscal cliff” — a combination of higher taxes and forced spending cuts scheduled to go into effect in 2013. The act prevents income tax rate increases for about 98% of taxpayers and makes other changes affecting individuals and businesses. Here’s a brief summary of the most important provisions.

Individual tax provisions

• Makes permanent 2012 ordinary-income tax rates, ranging from 10% to 35%
• Increases the top marginal tax rate to 39.6% on taxable income in excess of the applicable threshold of $400,000 (singles), $425,000 (heads of households) or $450,000 (married filing jointly)
• Allows the scheduled 2013 return of the limits on certain itemized deductions and personal exemptions — setting limit thresholds of $250,000 (singles), $275,000 (heads of households) and $300,000 (married filing jointly)
• Makes permanent 2012 long-term capital gains rates of 0% and 15%
• Increases long-term capital gains rate to 20% for taxpayers with taxable income exceeding $400,000 (singles), $425,000 (heads of households) or $450,000 (married filing jointly)
• Makes permanent long-term capital gains treatment for qualified dividends
• Makes permanent (and retroactive to Jan. 1, 2012) alternative minimum tax (AMT) relief
• Extends the deduction for state and local sales tax in lieu of state and local income tax
• Extends various child- and education-related credits and deductions
• Extends the ability of taxpayers age 70½ or older to make a direct tax-free rollover from an IRA to charity
• Extends certain home and energy-related breaks
• Increases the top estate tax rate to 40%
• Maintains the estate tax exemption amount at $5 million, inflation-adjusted annually

Business tax provisions

Several valuable tax breaks for businesses have been extended, such as:

• Bonus depreciation
• Enhanced Section 179 expensing
• Accelerated depreciation for qualified leasehold, retail and restaurant improvements
• The Work Opportunity credit
• The research and development credit
• Certain energy-related breaks

The impact on you

We’ve touched on only some of ATRA’s numerous provisions here. In addition, many breaks are subject to a variety of rules and limitations. So be sure to discuss them with your tax advisor to determine exactly how they’ll affect you. We’d be pleased to help.

On Jan. 2, Congress passed the American Tax Relief Act to address the fiscal cliff. The act makes permanent 2012 income tax rates for most taxpayers, as well as alternative minimum tax relief. It also extends many other breaks for individuals and businesses. However, the fiscal cliff deal does result in some tax increases; here are three of the most significant:

1. Payroll taxes. The act doesn’t extend payroll tax relief. So taxpayers with earned income will see a Social Security tax rate increase of two percentage points in 2013.
2. Income taxes. Beginning in 2013, taxpayers with taxable income that exceeds $400,000 (singles), $425,000 (heads of households) or $450,000 (married filing jointly) will face a marginal tax rate of 39.6% (up from 35%) and a long-term capital gains rate of 20% (up from 15%).
3. Estate taxes. While the $5 million (indexed for inflation) estate tax exemption has been made permanent, the top estate tax rate increases from 35% to 40% beginning in 2013.

To take a 2012 charitable donation deduction, the gift must be made by Dec. 31, 2012. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean? Is it the date you, for example, write a check or make an online gift via your credit card? Or is it the date the charity actually receives the funds — or perhaps the date of the charity’s acknowledgment of your gift?

The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:

Check. The date you mail it.

Credit card. The date you make the charge.

Pay-by-phone account. The date the financial institution pays the amount.

Stock certificate. The date you mail the properly endorsed stock certificate to the charity.

Many additional rules apply to the charitable donation deduction, so please contact us if you have questions about the deductibility of a gift you’ve made or are considering making.

If you own highly appreciated assets you’ve held long term, it may make sense to recognize gains now rather than risk paying tax at a higher rate next year:

1. The 15% long-term capital gains rate is scheduled to return to 20%.

2. Higher-income taxpayers will be subject to a new 3.8% Medicare tax on some or all of their net investment income.

As Congress and the President negotiate on how to address the fiscal cliff, it’s still unclear whether the 15% rate will be extended — especially for higher-income taxpayers.

Because a final deal in Washington may not be reached until the very end of the year — or even after Jan. 1 — you can’t necessarily afford to take a wait-and-see attitude. And the new 3.8% Medicare tax will go into effect regardless of what happens with the fiscal cliff. If you have questions about the potential tax impact on your investments, please contact us.

Business-related purchases of new or used vehicles may be eligible for Section 179 expensing, and business-related purchases of new vehicles may be eligible for bonus depreciation. But Sec. 179 expensing limits are scheduled to go down in 2013, and bonus depreciation is scheduled to disappear. So you might benefit from purchasing business vehicles before year end.

For 2012, the $139,000 Sec. 179 expensing limit generally applies to vehicles weighing more than 14,000 pounds. The limit is $25,000 for SUVs weighing more than 6,000 pounds but no more than 14,000 pounds.

Vehicles weighing 6,000 pounds or less are subject to the passenger automobile limits. For 2012, the depreciation limit is $3,160, but it’s increased by $8,000 for vehicles eligible for bonus depreciation.

Many rules and limits apply to these breaks. So if you’re considering a business vehicle purchase, contact us to learn what tax benefits you might enjoy if you make the purchase by Dec. 31.

The 2012 gift tax annual exclusion allows you to give up to $13,000 per recipient tax-free without using up any of your lifetime gift tax exemption. If you and your spouse “split” the gift, you can give $26,000 per recipient. The exclusion is scheduled to increase to $14,000 ($28,000 for split gifts) in 2013.

The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That’s because the future appreciation can avoid gift and estate taxes.

But you need to use your 2012 exclusion by Dec. 31 or you’ll lose it. The exclusion doesn’t carry from one year to the next. For example, if you don’t make an annual exclusion gift to your grandson this year, you can’t add $13,000 to your 2013 exclusion to make a $27,000 tax-free gift to him next year.

We can help you determine how to make the most of your 2012 gift tax annual exclusion.

If you’re self-employed, you may be able to set up a retirement plan that allows you to make much larger contributions than you could make as an employee. Plus, if you set up one of the following plans by Dec. 31, 2012, you can make deductible 2012 contributions until the 2013 due date of your tax return:

1. Profit-sharing plan. This allows discretionary contributions and flexibility in plan design. The 2012 contribution limit is $50,000 ($55,000 for taxpayers age 50 and older).

2. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. So you may be able to contribute more to a defined benefit plan than to a profit-sharing plan. The maximum future annual benefit toward which 2012 contributions can be made is generally $200,000.

Various caveats and limits apply, so contact us for details while there’s still time to set up a plan for 2012.

Available as a free download to Apple® or Android™ devices, the NetClient CS mobile app offers on-the go access to the services and content we have made available. You can access your tax returns and other documents pushed to NetClient CS by us. This convenient app is a mobile extension of our NetClient CS client portal services—making it even easier for you to connect with us and to have access to it anywhere, anytime.

Publicly traded stock and other securities you’ve held more than one year are long-term capital gains property, which can make one of the best charitable gifts. Why? Because you can deduct the current fair market value and avoid the capital gains tax you’d pay if you sold the property.

Donations of long-term capital gains property are subject to tighter deduction limits — 30% of adjusted gross income (AGI) for gifts to public charities, 20% for gifts to nonoperating private foundations. In certain, although limited, circumstances it may be better to deduct your tax basis (generally the amount paid for the stock) rather than the fair market value, because it allows you to take advantage of the higher AGI limits that apply to donations of cash and ordinary-income property (such as stock held one year or less).

Don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.

By projecting your business’s income for this year and next you can determine how to time income and deductions to your advantage.

Typically, it’s better to defer tax. You can do so by:

• Deferring income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services. But don’t let tax considerations get in the way of making sound business decisions.
• Accelerating deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before Dec. 31, so you can deduct it this year rather than next. But consider the alternative minimum tax (AMT) consequences first. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

In 2012, taking the opposite approach might be better. If it’s likely you’ll be in a higher tax bracket next year, accelerating income and deferring deductible expenses may save you more tax. And, because individual income tax rates are scheduled to go up in 2013, if your business structure is a flow-through entity, you may face higher rates even if your tax bracket remains the same.

Congress may, however, extend current tax rates for some or all taxpayers. Keep a close eye on Washington as year end approaches so you can adjust your timing strategy as needed if tax law changes do occur.