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Tax changes for 2012—The Good, the Bad and the Ugly

Larry F. Warner, Jr. CPA

January 15, 2012

 There are many important tax changes taking effect in 2012, as well as some that took effect late last year and thus are “new.” Here is a list of the more important changes separated by their effect on taxpayers.

 The Good (or not so Bad)

  • Basis reporting requirements. Investment companies and brokers must now provide basis information on the tax reporting form 1099-B which will make tax reporting of stock or mutual fund sales easier….if the basis reported on the form is correct.  The complex stock basis and character reporting rules under Code Sec. 6045(g) apply to shares in a regulated investment company (RIC, i.e., a mutual fund), or stock acquired in connection with a dividend reinvestment plan (DRP), if acquired after 2011.
  • Work opportunity tax credit (WOTC) not available except for hiring qualified veterans. The WOTC under Code Sec. 51 generally can't be claimed for an individual who begins work for the employer after Dec. 31, 2011. However, the WOTC is expanded and continues to be available for employers that hire qualified veterans who began work for the employer before Jan. 1, 2013.

 The Bad

  • Longer writeoff period for certain property. For specialized realty assets (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) placed in service after 2011, a 39-year (up from 15-year) writeoff period generally applies.
  • Reduced bonus depreciation allowance for qualified property. For qualified property acquired and placed in service after 2011 and before 2013 (after 2012 and before 2014 for aircraft and certain long-production period property), a 50% (down from 100%) bonus first-year depreciation allowance applies under Code Sec. 168(k).
  • Reduced expensing. For a tax year beginning in 2012, the Code Sec. 179 expensing election is reduced to $139,000, with a $560,000 investment-based ceiling (down from $500,000/$2 million). For tax years beginning after 2012, it will be further reduced to $25,000 with a $200,000 investment-based ceiling. Additionally for a tax year beginning after 2011, expensing can no longer be claimed for qualified real property.
  • Reduced alternative minimum tax (AMT) exemption amounts. Absent another AMT “patch,” the AMT exemption amounts for tax years beginning after 2011 revert to the significantly lower “permanent” amounts of $33,750 for unmarried taxpayers, $45,000 for joint filers, and $22,500 for marrieds filing separately.
  • Reduced adoption credit. For 2012, the total expenses that may be taken as a credit for all tax years with respect to the adoption of a child by the taxpayer will be limited to $12,650 (down from $13,360 for 2011), and the credit for the adoption of a special-needs child will also be $12,650 (down from $13,360 for 2011). Furthermore, the adoption credit will no longer be refundable.
  • Reporting foreign assets. Beginning in 2012, U.S. taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding $50,000 must report those assets to IRS on Form 8938, Statement of Specified Foreign Financial Assets, with their tax return.  

The Ugly

  • Community health needs assessment mandatory. To qualify as tax-exempt, for tax years after Mar. 23, 2012, under Code Sec. 501(r)(3), charitable hospital organizations will need to (i) conduct a community health needs assessment during the tax year or in either of the two tax years immediately preceding the tax year, and (ii) adopt an implementation strategy to meet the community health needs identified therein.
  • New guidance on deduction vs. capitalization of tangible property costs. IRS has issued temporary regs, generally effective in tax years beginning after 2011, on whether an item purchased or produced should be capitalized and depreciated, or deducted in the year purchased or produced.  These are very complex rules that are not very taxpayer friendly but do finally provide guidance.

Provisions that expired on Dec. 31, 2011. The following business and individual provisions expired at the end of last year. Note that Congress may retroactively reinstate some or all of these rules:

  • Election for itemizers to deduct State and local general sales taxes under Code Sec. 164(b)(5) in lieu of a state and local income taxes
  • Above-the-line deduction for qualified tuition and related expenses under Code Sec. 222
  • Treatment of mortgage insurance premiums as qualified residence interest under Code Sec. 163(h)(3)(E)
  • Above-the-line deduction for up to $250 of certain expenses of elementary and secondary school teachers under Code Sec. 62
  • Nonbusiness energy property credit under Code Sec. 25C
  • Adoption assistance programs under Code Sec. 137
  • Allowance of personal tax credits against regular tax and AMT under Code Sec. 26(a)(2)
  • Exclusion of 100% of gain on certain small business stock under Code Sec. 1202(a)(4)
  • Tax-free distributions (up to $100,000 annually for taxpayers 70- 1/2 and older) from individual retirement plans for charitable purposes under Code Sec. 408(d)(8)
  • Special rules to encourage contributions of capital gain real property for conservation purposes under Code Sec. 170(b)(1)(E) and Code Sec. 170(b)(2)(B)

With the national debt at an all-time high and the economy showing very slight signs of rebounding, there will be few changes in the “Good” category.  Once the dust settles from the fall elections, look for more legislative activity.  

 

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