The American Taxpayer Relief Act of 2012 (ATRA) passed Congress and was signed by the President January 3, 2013. ATRA changed many of the tax provisions that were scheduled to take effect in 2013 due to the expiration of the Bush-era tax cuts.
The compromise legislation represents a mixed bag for nearly all taxpayers.
For high-income taxpayers, the raised threshold for the 39.6 percent bracket and extension of lower capital gains and qualified dividend rates will be welcome. For many, the increase in the AMT exemption may also be helpful. However, the phase-out of itemized deductions and personal exemptions will likely increase the tax bill for many. Furthermore, the new 3.8 percent Medicare surcharge on investment income for high income taxpayers will also effectively increase income taxes for many with high incomes.
All wage earners will be adversely affected by the expiration of the payroll tax holiday. In 2012, the employee portion of FICA was reduced from 7.65 percent to 5.65 percent. For 2013, that reduction was not extended, meaning that workers will take home 2 percent less of the first $113,700 of wages.
While many of the changes of ATRA have been described as permanent, it’s hard to know whether that assertion is true. With the current US federal debt being in excess of $17 trillion, and a projected 2013 budget deficit in excess of $600 million, even with the changes in taxes; more tax changes are likely to be coming.
First time home-buyer penalty exemption:
On another note, sometimes people ask me if they can use IRA money to buy a house.
The answer is yes, and here is what you need to know. Distributions from traditional IRAs are completely income taxable for most taxpayers unless they have after-tax contributions in one or more traditional IRAs. If the taxpayer has after-tax contributions in any IRA, the distribution will be partly income tax free.
If the taxpayer is younger than age 59 ½, the taxable part of the distribution may also be subject to the 10 percent premature distribution penalty. There is a special exception to the penalty for distributions related to first-time home buyers.
The homebuyer can be the taxpayer or a close member of the taxpayer’s family (including the taxpayer’s spouse). To qualify for the exception, the money must be used within 120 days after distribution from the IRA for home purchase expenses.
A taxpayer can only use this exception to shelter up to $10,000 of distributions from the penalty tax during the taxpayer’s lifetime. However, if both spouses have IRAs, they can both use this exception to withdraw up to $20,000 penalty tax-free.
Although this may sound like a good deal, I think that the reality is most first-time home buyers are buying houses before they even get the $10,000 into their IRAs to begin with.