For the last several years, taxpayers have been allowed to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. This break can be valuable to those residing in states with no or low income taxes or who purchase major items, such as a car or boat. But this break had expired Dec. 31, 2011.

Now the American Taxpayer Relief Act of 2012 has extended it for 2012 and 2013. So see if you can save more by deducting sales tax on your 2012 return. And if you’re contemplating a major purchase, you may want to make it in 2013 to ensure the sales tax deduction is available

While the many revived breaks under the American Taxpayer Relief Act of 2012 (ATRA) are good news for taxpayers, they would have been better news had they been signed into law earlier.

Because many breaks were retroactively extended back to Jan. 1, 2012, numerous IRS forms have to be updated accordingly. But the IRS couldn’t get started until after the changes were signed into law Jan. 2, 2013. And this means many taxpayers will have to wait to file their 2012 returns.

Both individual and business taxpayers are affected. Forms that need to be updated include those for:

• Qualified adoption expenses
• The general business credit
• The Work Opportunity credit
• The research credit
• Empowerment Zone and Renewal Community credits
• New Markets credits
• Various energy-related tax breaks for individuals and businesses

Some of these forms might not be updated until March. Please contact us if you have questions about when you can file your 2012 tax return.

Section 179 expensing allows businesses a 100% deduction for the cost of qualifying asset purchases. Its 2012 benefits were recently enhanced by the American Taxpayer Relief Act of 2012 (ATRA).

Sec. 179 expensing is subject to an annual limit, which is phased out if purchases exceed a designated threshold. So if total purchases are large enough, a business might not be eligible for any Sec. 179 expensing.

Before ATRA, the expensing limit for 2012 was $139,000, with a $560,000 phaseout threshold. The act increases these amounts to $500,000 and $2 million, respectively (the same amounts that applied in 2010 and 2011).

These increases mean not only that many smaller businesses can enjoy a larger tax benefit, but also that some larger businesses that previously wouldn’t have been eligible because their asset purchases were too high may now qualify.

The limits had been scheduled to drop to $25,000 and $200,000, respectively, in 2013, but ATRA also extends the higher amounts through 2013.

Many rules apply, so please contact us to learn if you qualify on your 2012 return — or discuss whether you should plan purchases this year to benefit from the break on your 2013 return.

The American Opportunity credit (up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education) and the Lifetime Learning credit (up to $2,000 per tax return for postsecondary education expensesbeyond the first four years) reduce taxes dollar-for-dollar. Both a credit and a tax-free Section 529 plan or Coverdell Education Savings Account distribution can be taken as long as expenses paid with the distribution aren’t used to claim the credit.

But income-based phaseouts apply to these credits. If you don’t qualify because your income is too high, your child might. However, you must forgo your dependency exemption ($3,800 for 2012) for the child — and the child can’t take the exemption.

If your family incurred postsecondary education expenses in 2012, please contact us to determine how you can make the most of these credits.

On Jan. 15, the IRS announced a new simplified home office deduction, which is available beginning with 2013 income tax returns (not the 2012 returns generally due April 15, 2013).

Normally, if your home office qualifies, you can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses. Further, you can take a deduction for the depreciation allocable to the portion of your home used for the office. You can also deduct direct expenses, such as a business-only phone line and office supplies. However, the deduction generally requires completion of a 43-line form (Form 8829), often along with complex calculations.

The new simplified deduction is $5 per square foot for up to 300 square feet of home office space. So the maximum annual deduction is $1,500. If you choose this option, you can’t deduct depreciation for this portion of your home. But you can take itemized deductions for otherwise allowable mortgage interest and property taxes without allocating them between personal and business use.

Please contact us to determine whether you’re eligible for the home office deduction.

The American Taxpayer Relief Act of 2012 (ATRA) revives for 2012 and 2013 the opportunity to make tax-free IRA distributions (up to $100,000 per year) for charitable purposes. If you’re age 70½ or older, you can make a direct contribution from your IRA to a qualified charitable organization without owing any income tax on the distribution. This “charitable IRA rollover” can be used to satisfy required minimum distributions.

To help taxpayers take advantage of the 2012 revival, ATRA allows a charitable rollover made in January 2013 to be treated for tax purposes as if it had been made Dec. 31, 2012. And if you took an IRA distribution in December 2012 and contribute it to charity in January 2013, the “direct contribution” requirement is waived; you can contribute the distribution to a qualified charity in January 2013 and treat it as a 2012 direct contribution, provided the other requirements are met.

The IRS has updated income-tax withholding tables for 2013 in light of the American Taxpayer Relief Act of 2012, signed into law Jan. 2. Also, because the payroll tax holiday hasn’t been extended, employers must withhold Social Security tax at the rate of 6.2% rather than at the 4.2% rate that applied in 2011 and 2012.

According to the IRS, employers should start using the revised withholding tables and withholding the correct amount of Social Security tax “as soon as possible in 2013, but not later than Feb. 15, 2013.”

Employees don’t have to do anything, but you may want to revise your W-4 if you get married or divorced, have a child or buy a home. Revising your W-4 also may be a good idea if you hold multiple jobs or if when you file your 2012 return you have a large balance due or receive a large refund.

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.