I. INDIVIDUAL TAXATION
2012 Marginal Tax Brackets – The marginal income tax rates that were in effect for 2011 will continue into 2012 (10, 15, 25, 28, 33, 35 percent). As in prior years, the taxable income levels for each bracket have been raised by an inflation index factor. Thus, for example, the 25% bracket now runs from $70,700 to $142,700 of taxable income for joint filers and from $35,350 to $85,650 of taxable income for single filers. The 28% bracket runs from $142,700 to $217,450 for joint filers and from $85,650 to $178,650 for single filers. The standard deduction is now $11,900 on a joint return and $5,950 on a single return, while the personal exemption is now $3,800 for each dependent.
2013 Marginal Tax Brackets – For tax years beginning after 2012, the income tax rates for most individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6% as would have occurred when the Bush tax cuts expired). However, a 39.6% rate will apply for income above $400,000 single and $450,000 joint. These dollar amounts are inflation-adjusted for tax years after 2013. It is important to note that it will take a great deal more than $450,000 of income for a married couple to end up in the 39.6% bracket, depending on their deductions.
Marriage Penalty Relief – The Economic Growth and Tax Relief Act of 2001 (EGTRRA) under President Bush provided relief from the so-called marriage penalty by increasing the basic standard deduction for a married couple ﬁling a joint return to twice the amount for a single individual. EGTRRA also temporarily expanded the size of the 15 percent income tax rate bracket for married couples ﬁling a joint return to twice that of single ﬁlers to help mitigate the marriage penalty. The new tax act eliminated the EGTRRA sunset and retains the size of the 15% tax bracket for joint filers and qualified surviving spouses at 200% of the 15% tax bracket for individual filers.
Capital Gain Tax Rates - Capital gains are currently taxed at either 0% or 15% depending on your tax bracket. For tax years beginning after 2012, the 2012 Act provides that the top rate for capital gains will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). When including the 3.8% surtax on investment-type income and gains for tax years beginning after 2012, the overall rate for higher income taxpayers will be 23.8%.
For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains will permanently be subject to a 0% rate. Taxpayers, who are subject to a 25% or greater rate on ordinary income, but whose income levels fall below the $400,000/$450,000 thresholds, will continue to be subject to a 15% rate on capital gains. The rate will be 18.8% for those subject to the 3.8% surtax (i.e. those with modified adjusted gross income (MAGI) over $250,000 for joint filers or surviving spouses; $125,000 for a married individual filing a separate return; and $200,000 in any other case).
Qualified Dividend Tax Rates - Qualified dividends are currently taxed at favorable rates like capital gains (either 0% or 15%). Under pre-2012 Taxpayer Relief Act law, for tax years beginning after Dec. 31, 2012, dividends received by an individual were to be taxed at ordinary income tax rates. For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the top rate for dividends will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). When including the 3.8% surtax on investment-type income and gains for tax years beginning after 2012, the overall rate for higher income taxpayers will be 23.8%.
For taxpayers whose ordinary income is generally taxed at a rate below 25%, dividends will permanently be subject to a 0% rate. Taxpayers who are subject to a 25% or greater rate on ordinary income, but whose income levels fall below the $400,000/$450,000 thresholds, will continue to be subject to a 15% rate on dividends. The rate will be 18.8% for those subject to the 3.8% surtax (i.e. those with modified adjusted gross income (MAGI) over $250,000 for joint filers or surviving spouses; $125,000 for a married individual filing a separate return; and $200,000 in any other case).
Return of the Personal Exemption Phase-out - For tax years beginning after 2012, the Personal Exemption Phase-out (PEP), which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Under the phase out, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer's AGI exceeds the applicable threshold. These dollar amounts are inflation-adjusted for tax years after 2013.
Return of the Itemized Deduction Phase-out - For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the “Pease“ limitation on itemized deductions, which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Thus, for taxpayers subject to the “Pease” limitation, the total amount of their itemized deductions is reduced by 3% of the amount by which the taxpayer's adjusted gross income (AGI) exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. These dollar amounts are inflation-adjusted for tax years after 2013.
Alternative Minimum Tax (AMT) Exemption Permanently Increased - The alternative minimum tax is a parallel tax computation under which certain deductions are not allowed. The regular tax and the alternative minimum tax are calculated and compared, and the taxpayer pays the higher of the two. Essentially, AMT is a flat tax at 26% to 28% depending on the level of income. For 2011, the AMT exemption was $74,450 for joint filers and $48,450 for single filers. Both exemptions begin to phase out with alternative minimum taxable income above $150,000 and $112,500, respectively. Prior to the new tax act, without another extension for 2012, the exemption amounts were scheduled to revert back to $45,000 and $33,750 respectively, resulting in an AMT which would trap nearly 30 million taxpayers. Effective retroactively for 2012, the new tax act permanently set the AMT exemption amounts at $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. In addition, for tax years beginning after 2012, these exemption amounts are indexed for inflation.
3.8% Medicare Contribution Tax - Although not part of the American Taxpayer Relief Act, one of the more significant areas of change going into 2013 is the new 3.8% tax on the net investment income of taxpayers with modified adjusted gross income in excess of $200,000 ($250,000 joint). Net investment income includes among other things, net gains from property held for investment and gross income from dividends, interest, royalties, annuities, rents, passive business activities, and business of trading in financial instruments or commodities. The tax does not apply to net income from business activity unless it is passive, and it does not apply to distributions from a qualified plan or an IRA. The tax is calculated as 3.8% times the lesser of net investment income, or the amount by which modified adjusted gross income exceeds the above threshold amounts.
Additional .9% Medicare Tax on Earned Income - Beginning in 2013, there is an additional .9% Medicare tax required to be withheld from the wages of single individuals who earn over $200,000 and married couples filing jointly who earn over $250,000. The tax is imposed on the portion of earned income that exceeds the threshold amount and must be paid with the taxpayer's return, if it is not withheld. Self-employed individuals will have to allow for this tax when determining estimated payments.
Education Credits and Deductions:
American Opportunity Tax Credit (“AOTC”) – The American Opportunity Tax Credit (AOTC) which was scheduled to expire at the end of 2012, has now been extended for five years. The credit begins to phase out for single individuals with modiﬁed AGI of $80,000 ($160,000 for married couples ﬁling jointly) and completely phases out for single individuals with modiﬁed AGI of $90,000 ($180,000 for married couples ﬁling jointly). The maximum credit is $2,500 per student and can be claimed in all four years of college. The definition of qualified higher education expenses includes tuition and the cost of course materials, and 40% of the credit is refundable, meaning it can result in a tax refund, not just bring the tax liability to zero.
If the parent taxpayers’ income is too high to take advantage of the AOTC, sometimes it is advantageous for the student/child to take the credit, assuming he or she has enough taxable income to benefit. For the child to be eligible, the parents must forego the dependency exemption, and the education expenses are deemed to be paid by the child. Coordination of the student/child’s tax return with that of the parents is critical in these situations to ensure that the lowest possible tax is paid by the family group as a whole.
Higher Education Tuition Deduction – The above-the-line higher education tuition deduction expired at the end of 2011, but has now been retroactively extended for 2012 and 2013. It allows eligible taxpayers to deduct the costs of qualified higher education expenses paid during the year for themselves, a spouse, or a dependent. The maximum deductible amount is $4,000 for taxpayers with adjusted gross income not exceeding $65,000 ($130,000 for joint filers). Taxpayers who exceed these income limits but do not exceed $80,000 ($160,000 for joint filers) may deduct up to $2,000 in qualified expenses.
It is important to note that these incomes are not phase out ranges but absolute limits. Thus, a married couple with $160,001 of income can lose a $2,000 above-the-line deduction because of $1 of extra income. Further, coordination and comparison of education credits and education deductions must be evaluated to ensure that the optimal tax reduction strategy is used on the taxpayer’s return.
Teachers’ Classroom Expense Deduction – Eligible elementary and secondary school teachers may claim an above-the-line deduction for up to $250 per year of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom. Under pre-Act law, the educator expense deduction expired at the end of 2011. The new tax act retroactively extends the educator expense deduction for two years so that it applies to expenses paid in tax years 2012 and 2013. Expenses that exceed $250 and non-classroom supplies may be deducted as an employment-related miscellaneous itemized deduction subject to the two-percent floor for taxpayers who itemize.
Medical Expense Deduction for Special Foods – In a private letter ruling, IRS noted that the excess cost of specially prepared foods designed to treat a medical condition over the cost of ordinary food that would have been consumed but for the medical condition, is an expense for medical care. The taxpayer must clearly establish the medical purpose of the special diet. Thus, for example, the excess cost of a gluten-free food product over a similar non-gluten free food product would be considered a cost of medical care eligible for a tax deduction.
Medical Expense Deduction Threshold – Under the Healthcare Reform Act passed in 2010, effective in 2013, medical expenses have to exceed 10% (previously 7.5%) of AGI in order to be deductible. The threshold remains at 7.5% for taxpayers age 65 older until tax year 2017 when the higher threshold would apply to all taxpayers.
State and Local Sales Tax Deduction – Taxpayers who itemize deductions may elect to deduct state and local general sales and use taxes instead of state and local income taxes. Under pre-Act law, this choice expired at the end of 2011. The new tax act retroactively extends this provision for two years so that itemizers can elect to deduct state and local sales and use taxes instead of state and local income taxes for tax years 2012 and 2013.
Charitable Contribution Deductions (cash) – As a reminder, there are a number of significant substantiation rules for charitable contribution deductions which taxpayers often forget when attempting to lower the amount of taxes they owe. All cash contributions must be documented with a bank record, such as a canceled check, or a written acknowledgment. Those of $250 or more require the written acknowledgment from the charitable organization. No deduction is allowed for cash contributions without documentation, and contrary to popular belief, there is no minimum allowable contribution deduction amount. In short, everything needs to be documented or it could be disallowed.
Charitable Contribution Deductions (non-cash) – Deductions may be taken for the fair market value of donated used clothing and household items that are at least in "good used condition or better". The fair market value of non-cash property generally is the price for which it would sell on the open market. The burden of establishing the fair market value of the donated items is on the taxpayer seeking to deduct the donation. If the donated item exceeds $5,000 in value, the taxpayer is required to obtain a qualified appraisal and attach it to the tax return. If the property exceeds $500 in value, the taxpayer must obtain (but not attach) a written acknowledgment from the charity containing, among other things, a date and a description of the property. The taxpayer is also required to keep a written record containing: (1) the approximate date and manner of acquisition of the property, and (2) the cost or other basis of the property. Thus, taxpayers seeking to deduct the value of clothing and household items donated to Goodwill or other similar organizations should make sure they obtain dated receipts and keep lists or photographs of the items they donate. A useful website for valuing used clothing can be found at www.SalvationArmyUSA.org.
Mortgage Insurance Premiums – Mortgage insurance premiums paid or accrued by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer's qualified residence are treated as deductible qualified residence interest, subject to a phase out based on the taxpayer's AGI. Under pre-Act law, this provision expired at the end of 2011. The new tax act retroactively extends this provision for two years so that a taxpayer can deduct, as qualified residence interest, mortgage insurance premiums paid or accrued in 2012 and 2013.
IRA Custodial and Management Fees – Fees paid to managers and custodians of IRA assets are deductible as a miscellaneous itemized deduction subject to the 2% of AGI floor, provided they are paid with funds from outside the IRA. However, commissions/fees for the purchase or sale of IRA securities paid with funds outside the IRA are deemed to be IRA contributions and are not deductible.
Legal Fees – Many taxpayers have a misunderstanding of the deductibility of legal fees. In general, legal fees qualify as a 2 percent miscellaneous itemized deduction, but only in limited circumstances. These include (1) fees incurred in connection with tax advice, but not for drafting a will; (2) fees in connection with collecting alimony, but not to defend against a request for alimony; and (3) fees in connection with keeping a job or preserving income.
Child Tax Credit – The new act extends through 2017 the $1,000 child tax credit for each child under age 17. The refundable portion of the credit remains at 15% of the taxpayer’s earned income in excess of $3,000. As in the past, a child who qualifies for the credit must also be the taxpayer’s dependent. This affects head of household filers with a qualifying child who is not claimed as a dependent. The child credit begins to phase out for single filers with adjusted gross income of $75,000 and for joint filers with adjusted gross income of $150,000.
Dependent Care Credit - For 2012 returns, the maximum amount of eligible expenses for the dependent care credit is $3,000 for one qualifying individual and up to $6,000 for more than one qualifying individual. The maximum credit is 35 percent of qualifying expenses. The percentage drops (but not below 20 percent) by one percentage point for each $2,000, or fraction thereof, of AGI above a $15,000 threshold amount. The new tax act makes these dependent care credit provisions permanent instead of reverting back to lower levels in place several years ago.
Non-business Energy Property Credit - The new tax act retroactively extended for two years (2012 and 2013) the credit for making qualified energy efficient improvements to an existing principal residence. The credit is subject to a lifetime maximum of $500 including credits taken in prior years. Qualified improvements include materials but not labor to install insulation, exterior windows or skylights, exterior doors, and certain metal or asphalt roofs. Other qualified improvements which count the materials along with the installation costs include electric heat pump water heaters, electric heat pumps, central air conditioning, natural gas or propane or oil heaters, qualified natural gas, propane or oil furnaces or boilers, and air circulating fans.
II. BUSINESS TAXATION
Section 179 Deduction – The new tax act retroactively increased the amount of qualifying capital expenditures a business can expense under Code Section 179 on 2012 returns from $139,000 to $500,000. Generally, qualifying property must be tangible personal property which is actively used in the taxpayer’s business and for which a depreciation deduction would be allowed. The property can be new or used, must be used more than 50 percent for business, and includes off-the-shelf computer software. Certain real property is also eligible for expensing. Thus the $500,000 amount can include up to $250,000 of qualified leasehold improvement property, restaurant and retail improvement property. The maximum Section 179 deduction for 2013 is also $500,000, and unless the law is changed, the maximum for 2014 and beyond will drop to $25,000.
50% Bonus Depreciation – The new tax act extended to 2013 the provision under which taxpayers may deduct 50% bonus depreciation on qualifying capital expenditures. Bonus depreciation had been scheduled to expire at the end of 2012. To qualify for bonus depreciation, the property must be (1) eligible for the modified accelerated cost recovery system (MACRS) with a depreciation period of 20 years or less; (2) water utility property; (3) computer software (off-the-shelf); or (4) qualified leasehold improvement property. In addition, the use of the property must originate with the taxpayer, i.e. the property must be new.
Luxury Autos and “Heavy” SUVs – The first-year limit on depreciation for luxury passenger automobiles placed in service in 2012 is $3,160 for passenger vehicles and $3,360 for vans and trucks. However, this limit is increased by $8,000 when bonus depreciation is claimed for a qualifying vehicle placed in service during 2012. This results in a maximum first-year depreciation of no more than $11,160 for autos and $11,360 for vans or trucks. Remember that these are maximum limits based on 100% business use of the vehicle. If the business use of the vehicle falls below 50% in a subsequent year, then bonus depreciation must be recaptured. Also remember that the vehicle must be new in order to claim bonus depreciation.
A luxury automobile is defined as a passenger automobile or a truck, van, or SUV with a gross vehicle weight of 6,000 pounds or less, and an original cost greater than $15,300. If the vehicle has a loaded gross weight in excess of 6,000 pounds, then it is not considered a luxury automobile for depreciation purposes, it is not subject to the depreciation limits, and it can be depreciated using the same rules as any other five-year asset, with the exception that the Section 179 deduction cannot exceed $25,000.
The combination of the 50% bonus depreciation allowance and the over 6000 pounds provision for “heavy” SUVs presented a unique opportunity for business taxpayers to write off a substantial portion of the cost of a light truck or SUV in 2012, assuming 100% business use of the vehicle.
Standard Mileage Rates – The 2012 rate for business use of a vehicle is 55.5 cents per mile for the entire year. The rate increases to 56.5 cents for 2013. Remember, however, taxpayers claiming a deduction for business use of a vehicle are required to maintain a contemporaneous written record of each business trip. The standard mileage rate for medical miles is 23 cents for all of 2012, and increases to 24 cents per mile in 2013. The mileage rate for charitable miles is remains at 14 cents for all of 2012 and 2013.
Schedule C Audits – IRS continues to focus its attention on small businesses that file a Schedule C, with emphasis placed on those reporting revenue between $100,000 and $200,000. Audit results have shown that a significant portion of the so call “tax gap” (the difference between correct tax liabilities and taxes actually collected) comes from under-reporting by sole proprietors. IRS statistics also show that tax returns with a Schedule C have a higher chance of being audited than returns without a Schedule C. Some of the particular areas being examined include unreported income (cash sales), personal expenses deducted on Schedule C, recordkeeping for business vehicle use, and deducting insurance that is personal. A Schedule C that shows net income well below 50% of gross revenues has a greater likelihood of being selected for examination. Schedule Cs with consistent year after year losses will be presumed to be a hobby activity with no profit motive, and with the burden of proof on the taxpayer to show otherwise.
In July 2011, IRS published two new Audit Technique Guides (ATGs) covering audits of attorneys and consultants. These guides are a “roadmap” of what to expect if you are in one of those fields and happen to be selected for audit. There are other previously published ATGs covering various types of businesses.
IRS agents are now trained to use QuickBooks software and have been requesting an electronic copy of the Company QuickBooks file. Agents are promising to look only at the information for the period under audit unless the examination is expanded. This is all the more reason for a business to make sure their QuickBooks database contains accurate data, particularly, names of payees, memos on checks, and explanations for adjustments.
If you operate a business, particularly one that reports on a Schedule C, it is extremely important that you adhere to a few basic principles regarding the deductibility of expenses. A business expense is deductible only if it is "ordinary, necessary, and reasonable" as defined by IRC Sec. 162(a). You must retain documentation to support the business purpose of the expense and the method of payment. If expenses are paid with cash, you must be able to show where the cash came from in addition to the receipt or invoice.
For revenues, it is important to keep a record of the source of all deposits to both your business and personal bank accounts to avoid any confusion as to what constitutes taxable business receipts as opposed to distributions and loans to/from the business.
Finally, there is a requirement to maintain accounting records from which the profit or loss of the business can be determined. In the absence of accounting records which reconcile to banking activity, IRS has the discretion to use alternative methods of calculating income, such as the “bank deposits/cash expenditures” method. The business that has a well maintained and reconciled set of accounting records will likely fare better in an examination than the business whose Schedule C is prepared based on amounts written on a single piece of paper with no supporting detail. An examiner who is presented with good accounting records will gain confidence that the taxpayer is organized and the return is more likely to be accurate than not.
Tax-Free Distributions from IRAs for Charitable Purposes – The new tax act retroactively extended to 2012 the provision under which taxpayers age 70½ and above could make tax-free distributions from IRAs of up to $100,000 directly to a qualified charitable organization. This provision had expired at the end of 2011. The Act includes two elections to deal with the retroactive reinstatement of this provision; (1) a taxpayer may elect to have a distribution made in January of 2013 be treated as if it were made on Dec. 31, 2012, and (2) a taxpayer may elect to treat any portion of a distribution from an IRA to the taxpayer during December of 2012 as a qualified charitable distribution, provided that the portion is transferred in cash after the distribution to an eligible charitable organization before Feb. 1, 2013.
IRA Contributions – The maximum IRA contribution for 2012 (traditional or Roth) is unchanged at $5,000. The catch-up contribution for ages 50 and older remains at $1,000. For 2013, the maximum IRA contribution increases to $5,500 while the catch-up contribution remains at $1,000. Remember, you have until April 15, 2013 (the due date of 2012 returns without extension) to make an IRA contribution for 2012.
Simple Plans – For 2012, the limit on employee contributions to a Simple Plan was $11,500 with a catch-up limit of $2,500. For 2013, the regular contribution limit increases to $12,000 and the catch-up limit remains the same.
401K Plans – For 2012, the maximum employee deferral into an employer 401K plan was $17,000 plus a $5,500 catch-up contribution if 50 years old. For 2013, the regular deferral limit increases to $17,500 while the catch-up limit remains at $5,500.
IV. FOREIGN FINANCIAL ACCOUNTS
In recent years, there has been much attention placed on what had been little known, and often ignored, disclosure and reporting requirements for US citizens with foreign financial accounts. In general, US citizens (whether residing in the US or abroad) with any interest (including a mere signature authority) in a foreign bank account are required to disclose the existence of the account by answering “yes” to one of two questions at the bottom of Schedule B Interest and Dividend Income. Many taxpayers and tax preparers overlook these two questions and don’t even think about them. Tax software is often set to automatically answer “no” to these questions, unless affirmatively over-ridden by the preparer. If the aggregate value of all foreign accounts exceeds $10,000 at any time during the year, then the taxpayer is required to file a Form TD F90-22.1, commonly known as an FBAR (Foreign Banks and Financial Report). Failure to file an FBAR can subject a taxpayer to fines as large as $500,000, and criminal prosecution.
Since 2009, the Treasury Department has carried out three initiatives that offered amnesty and limited penalties to taxpayers who voluntarily came forth, disclosed the existence of their foreign accounts, paid any taxes due on unreported income and filed any unfiled FBARs. The objective of these initiatives was to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws. At the present time, the third initiative known as the 2012 Offshore Voluntary Disclosure Program (OVDP) is still open to taxpayers who want to make a voluntary disclosure. Unlike the prior two programs, the 2012 program is opened-ended with no deadline for participation, although that could change at any time. In the past, the Treasury has indicated that it will ultimately impose all available sanctions on individuals who fail to participate in the program, yet still have undisclosed foreign accounts and ultimately, unreported taxable income.
Continuing the theme of tax compliance in this arena, in 2011 IRS implemented a new Form 8938 (Statement of Specified Foreign Financial Assets) on which taxpayers are required to report specific types and amounts of foreign financial assets or accounts. The form is required when the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in the US and filing a joint return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year, or totaled more than $150,000 at any time during the year. It is important to note that Form 8938 does not in any way replace the FBAR reporting requirements. However, the form is not required to be filed if the taxpayer does not have to file an income tax return.
If you have an interest in a foreign financial account and are concerned about complying with the existing and new reporting requirements, please be sure to contact me for a consultation. At a minimum, it is critical that any taxpayer with a foreign account properly and accurately answer the two questions at the bottom of Schedule B.
V. ESTATE AND GIFT TAXES
The 2012 Tax Relief Act permanently establishes the estate tax exemption amount at $5 million per person. Indexing increased the exemption to $5,120,000 for 2012. Based on inflation data, the exemption amount is expected to be $5,250,000 for gifts made and decedents dying in 2013.
The maximum estate and gift tax rate was 35% for gifts made and decedents dying in 2012. The 2012 Taxpayer Relief Act changes the top rate to 40% for gifts made and decedents dying after 2012. Under the Act, transfers over $500,000 are taxed at 37%, transfers over $750,000 are taxed at 39% and transfers over $1,000,000 are taxed at 40%.
The annual gift tax exclusion amount was $13,000 per year, per gift in 2012. This is the amount that a person can gift to another person without the need to file a gift tax return. The exclusion amount increases to $14,000 in 2013.
VI. NEW JERSEY TAX DEVELOPMENTS
Gross Income Tax Alternative Business Calculation – New Jersey gross income tax law has always provided for the maintenance of separate categories (“buckets”) of income and losses and has never permitted the netting of profits from one bucket with losses in another bucket. For example, the net profit from a Schedule C could not be offset by a loss on a Schedule E. For 2012 tax returns, individual taxpayers will now be able to offset gains and losses between categories to a limited extent. In particular, net profits from business, net gains or net income derived from rents, royalties, patents and copyrights, distributive share of partnership income, and net pro-rata share of S-Corp income will now be able to be netted against each other. Taxpayers still cannot apply business-related losses in these categories against income from non-business categories such as wages, capital gains and losses, and investment income.
The new law also allows unused net losses from the business-related categories to be carried forward and applied against future taxable income. A new term – “Alternative Business Income or Loss” has been introduced to facilitate the inter-category loss netting of the four business categories and the carry forward of unused losses.
S-Corporation Minimum Tax – Effective January 1, 2012, the minimum tax on NJ S-Corps has been reduced to a new range of $375 to $1,500 for businesses with gross receipts ranging from $99,999 to $1 million or more.