The Indiana inheritance tax was recently repealed retroactively for decedents dying on or after Jan. 1, 2013. Even if the decedent’s estate is small enough (generally under $5.25 million for decedents dying in 2013) such that no federal estate tax return is required to be filed, it will still be important to value assets as of the date of death for income tax purposes. That is, the estate’s/heirs’ income tax basis will be the fair market value of the assets as of the date of the decedent’s death. Further, estate (and perhaps trust) income tax returns will still need to be filed.

For more information, contact your KSM advisor.

• Proposed Accounting Standards Update on Discontinued Operations
   
• Update on the FASB Lease Proposal

Proposed Accounting Standards Update on Discontinued Operations

In April 2013, the Financial Accounting Standards Board (FASB) issued a proposed accounting standards update (ASU), Presentation of Financial Statements (Topic 205): Reporting Discontinued Operations, for public comment. The amendments in the proposed update will address a common complaint that too many disposals of assets currently require discontinued operations presentation in the financial statements. Current discontinued operations reporting guidelines can result in financial statements that are not useful to users of the financial statements and can be more difficult to prepare.

Currently, a component of an entity should be classified as a discontinued operation if: 1) it has been disposed of or is held for sale, 2) the operations and cash flows of the component have been or will be eliminated from the ongoing operations of the entity because of the disposal, and 3) the entity will not have significant continuing involvement in the operations of the component after the disposal.

Under the proposed amendments, a component of an entity would only be treated as a discontinued operation if: 1) it has been disposed of or is held for sale, and 2) it is part of a single coordinated plan to dispose of a separate major line of business or separate major geographical area of operations.

Disposals of equity method investments that meet the above definition of a discontinued operation would be eligible for discontinued operations presentation. Also, the requirement that the operations and cash flows of the component have been or will be eliminated from the ongoing operations of the entity because of the disposal, and the entity will not have significant continuing involvement in the operations of the component after the disposal, would be eliminated by the amendments.

The proposed amendments would require additional disclosures about discontinued operations including the major income and expense items, major classes of cash flows, a reconciliation of the major classes of assets and liabilities held for sale that are disclosed in the financial statements to what is presented on the balance sheet, and a reconciliation of the major income and expense items that are disclosed in the notes to the financial statements to the after-tax profit or loss from the discontinued operation on the income statement. The proposed amendments will also require disclosures related to the disposal of an individually material component of an entity that does not qualify for discontinued operations presentation. Also proposed are expanded disclosures about an entity’s continuing involvement with a discontinued operation including the amount of cash inflows and outflows from and to the discontinued operation and disclosures about a discontinued operation in which an entity retains an equity method investment after the disposal.

The effective date of the proposed amendments will be determined after the FASB considers the feedback received. The proposed amendments will be applied prospectively and earlier adoption will be permitted. Comments on this proposed ASU are due by Aug. 30, 2013.

Update on the FASB Lease Proposal  

The FASB has announced that it will release for public comment in May 2013 a re-exposure on the proposed ASU on the financial reporting for leases. The lease proposal will be converged with the International Accounting Standards Board exposure draft that is expected to be released in June 2013.

The lease proposal will require that all leases be recorded on the balance sheet of lessees. On the income statement, expenses would be recognized depending on whether significant consumption of the asset occurs during the lease. Leases where the asset depreciates significantly during the lease term (equipment and vehicles, for example) would be accounted for differently than assets that do not depreciate or increase in value (land and buildings, for example). Leases for assets with significant consumption of the asset would be expensed through amortization of the asset and interest expense on the lease liability. The expense would generally decrease over the term of the lease resulting in front-loaded expenses. For leases of assets without significant consumption of the asset, the lease payments would be expensed on a straight-line basis over the lease term.

The re-exposure of the proposed ASU on leases is expected to be out for comment for a 120-day period. For a full status update on the proposal, refer to the FASB website.

• FASB and IASB Reach Tentative Decisions on Revenue Recognition Proposal
   
• FASB Issues Proposed Guidance on Financial Assets and Liabilities
   
• FASB Issues ASU 2013-05

FASB and IASB Reach Tentative Decisions on Revenue Recognition Proposal

Revenue is a key number for users of financial statements in assessing an entity’s financial performance. As part of the ongoing Financial Accounting Standards Board (FASB) and International Accounting Standards Board’s (IASB) (the Boards) joint projects, they continue to discuss revenue recognition. This has been one of their key projects, and one that has been ongoing for a number of years. The first Discussion Paper on this topic was released in December 2008. The Boards’ main objectives were to develop more consistent requirements, improve comparability, and provide more useful information to users of financial statements.

The Boards have recently reached tentative decisions on the revenue recognition disclosure issues related to the following:

1. Disaggregation of revenue
2. Reconciliation of contract balances
3. Remaining performance obligations
4. Assets recognized from the costs to obtain or fulfill a contract with a customer
5. Onerous performance obligations
6. Qualitative information about performance obligations and significant judgments

The Boards also reached tentative decisions on transition, effective date and early application. The tentative transition guidance would allow an entity to apply the new revenue standard retrospectively with optional enhanced practical expedients. An entity would also be allowed to elect an alternative transition method that would require:

1. Applying the new revenue standard only to contracts that have not been completed under old standards;
2. Recognizing the cumulative effect of initially applying the new standard to the opening balance of retained earnings; and
3. Providing additional disclosures related to the amount by which each financial statement line item is impacted and explanation of the significant changes in reported results under the new standard.

The revenue recognition guidance would be effective for annual periods beginning on or after Jan. 1, 2017. Early application would not be permitted.

The Boards noted that the period of time from the expected issuance of the standard until its effective date is longer than usual due to the unique attributes of the revenue recognition project, including the scope of entities that will be affected and the potentially significant effect that a change in revenue recognition has on other financial statement line items.

The Boards have completed their substantive redeliberations of the 2011 exposure draft. The FASB staff has begun drafting the final revenue recognition standard, with final release expected in the second quarter of 2013. See the FASB website for a complete update on the revenue recognition project.

FASB Issues Proposed Guidance on Financial Assets and Liabilities  

The FASB has issued a proposed Accounting Standards Update (ASU), Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The proposed ASU is part of the joint projects with the IASB to converge the accounting for financial instruments, and to provide a comprehensive measurement framework for classifying and measuring financial instruments.

As described below, the proposed accounting standard would measure financial assets based on how a reporting entity would realize value from them as part of distinct business activities, while the measurement of financial liabilities would be consistent with how the entity expects to settle those liabilities.

Financial assets would be classified into one of three categories:

1. Amortized cost;
2. Fair value through other comprehensive income (OCI); or
3. Fair value through net income.

Equity investments (except those accounted for under the equity method of accounting) would be measured at fair value with changes in fair value recognized in net income. A “practicability exception” to measurement at fair value would be provided for equity investments without fair values that can be readily determined.

Financial liabilities would generally be required to be carried at cost unless: 1) the reporting organization’s business strategy is to transact at fair value, or 2) the obligation results from a short sale.

Public companies would be required to disclose fair values parenthetically on the face of the balance sheet for financial assets and financial liabilities measured at amortized cost, with exceptions for demand deposit liabilities and receivables and payables due in less than a year. Nonpublic entities would not be required to disclose this fair value information parenthetically or in the notes. Comments on the proposal are due by May 15, 2013.

FASB Issues ASU 2013-05 

The FASB has issued Accounting Standards Update (ASU) No. 2013-05, Foreign Currency Matters (Topic 830) Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.

When a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or business within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. The cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided.

For an equity method investment that is a foreign entity, the partial sale guidance in Section 830-30-40 still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. This treatment does not apply to an equity method investment that is not a foreign entity. In those instances, the cumulative translation adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment.

The ASU also provides clarification as to what events comprise a sale of an investment in a foreign entity.

For public entities, the amendments in this ASU are effective prospectively for fiscal years beginning after Dec. 15, 2013. For nonpublic entities the amendments in this ASU are effective prospectively for the first annual period beginning after Dec. 15, 2014, and interim and annual periods thereafter. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted.

The Indiana General Assembly has passed legislation providing for an Automatic Taxpayer Refund (ATR) credit for tax year 2012. This credit is a refundable credit and is $111 per eligible taxpayer ($222 for an eligible married couple filing a joint return). In order to qualify for the credit, you must meet all three of the following qualifications:

1. Timely filed (including extensions) a full-year Indiana resident income tax return for tax year 2011;
2. Timely file (including extensions) a full-year Indiana resident income tax return for tax year 2012;
3. Owe some tax to the state for 2012. 

How do I determine if I am eligible for the credit, and how do I calculate it? 

In order to determine if you qualify for the credit, you can walk through the following steps: 

Step 1: Determine if you meet the prior year filing requirement (view flowchart)

Step 2: Determine if you meet the current year filing requirement (view flowchart)

Step 3: Determine if you have a modified state tax liability

In order to claim the ATR credit, you must have a modified state tax liability. Your modified state tax liability is your gross income tax liability less the following credits: 

• College Contribution Credit
• Credit for Taxes Paid to Other States
• Unified Tax Credit for the Elderly
• Earned Income Credit
• Lake County Residential Income Tax Credit
• Other Specific Credits

If your modified state tax liability is greater than zero, continue to Step 4. If it is less than zero, STOP. Neither you nor your spouse (if married filing jointly) can take the credit. 

Step 4: Determine your ATR credit

If you are single or married filing separately, your ATR credit is $111. If you are married filing jointly, continue below: 

1. If you timely filed a 2011 Indiana full-year resident income tax return AND you are timely filing a 2012 Indiana state income tax return, the credit associated with you is $111. If not, the credit associated with you is zero.
2. If your spouse timely filed a 2011 Indiana full-year resident income tax return AND your spouse is timely filing a 2012 Indiana state income tax return, the credit associated with your spouse is $111. If not, the credit associated with your spouse is zero.

Add the results from 1 and 2 above to get the total ATR credit associated with you and your spouse.

What else do I need to know? 

It is important to note that dependents are not eligible to claim the ATR unless they file their own state tax return. Also, you must have a tax liability in order to qualify. This liability is determined before withholding is taken into account but after credits, deductions and exemptions. 

In order to qualify, as noted above, your income tax returns must be “timely filed.” In order to be timely flied, the following must have occurred:

• Your 2011 Indiana tax return must have been filed by the 4/17/12 due date, unless it was extended. 
• Your 2012 Indiana tax return must be filed by the 4/15/13 due date, unless it was extended. 

If your return(s) were extended, the return must have been (or will be) filed within the extension period. 

Examples

1. Brandon has $22,000 wage income and claims a $1,000 exemption. His state tax due before credits is $714 ($22,000 - $1,000 = $21,000 X .034 state tax rate = $714 modified state tax liability). His state withholding credit is $800. Even though Brandon had more than $714 withheld, he still qualifies for the $111 ATR credit. With the $111 ATR credit and his $86 overpayment of taxes, his total refund is $197.
2. Olivia has $742 wage income and claims a $1,000 exemption. Her state tax due before credits is zero ($742 - $1,000 = -$258 = no modified state tax liability). Her withholding credit is $25. Since she doesn’t have a modified state tax liability, she is not eligible for the ATR credit. Olivia’s refund is $25.
3. Jim had a valid state extension of time to file (he filed a Form IT-9 as well as a federal Form 4868), which extended the time he had to file his 2011 state tax return to Nov. 15, 2012. He filed on June 11, 2012. Therefore, his 2011 state return was timely filed and, assuming he meets the other eligibility conditions, he would be able to claim the ATR credit. 

Comment Period Expires for Proposed Financial Reporting Framework for SMEs

The comment period for the AICPA’s Proposed Financial Reporting Framework for Small- and Medium-Sized Entities (SMEs) ended Jan. 30, 2013. The Financial Reporting Framework for SMEs will provide a special purpose framework of accounting that blends traditional methods of accounting with income tax methods. The framework is intended to serve as a less complex and less costly alternative to generally accepted accounting principles in the United States (U.S. GAAP) and is intended for smaller-to-medium-sized, owner-managed, for-profit entities where users of the financial statements have direct access to the owner-manager. The framework is for entities that are not required to have U.S. GAAP financial statements.

Once the final document is released, owner-managed entities may wish to consider this alternative. Owner-managers should consult with their CPA practitioners, lenders and other users of the financial statements prior to changing the accounting framework of their companies. See the AICPA resource page for additional information.

FASB Issues ASU on Balance Sheet Offsetting

The FASB issued Accounting Standards Update (ASU) No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, to clarify the scope of ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 indicates that ASU 2011-11 applies only to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that either offset in accordance with specific criteria included in Section 210-20-45 or Section 815-10-45 of the Codification or are subject to a master netting arrangement or similar agreement. Ordinary trade receivables and payables are not in the scope of ASU 2011-11, which was intended to provide comparable information about balance sheet offsetting between financial statements prepared on the basis of U.S. GAAP and financial statements prepared on the basis of International Financial Reporting Standards.

Entities with derivative arrangements described above will be impacted by this update. Entities are required to apply the amendments for fiscal years beginning on or after Jan. 1, 2013, the same effective date as ASU 2011-11, and should provide the required disclosures retrospectively for all comparative periods presented.

FSAB Issues ASU on Amounts Reclassified Out of Accumulated Other Comprehensive Income

The FASB has also issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the reporting of reclassifications out of accumulated other comprehensive income (AOCI). The ASU requires entities to provide information about amounts being reclassified out of AOCI by component of other comprehensive income. The ASU further requires the presentation of significant amounts reclassified out of AOCI by respective line items of net income, if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The presentation must be in one location but may be provided in the notes to the financial statements or in the statement where net income is presented. For amounts not required to be reclassified in their entirety to net income under U.S. GAAP, an entity must cross-reference to other disclosures providing additional detail about these amounts.

ASU 2013-02 will impact all entities that report items of other comprehensive income, but does not substantially change the information being presented. For nonpublic entities, the update is effective prospectively for reporting periods beginning after Dec. 15, 2013, with early adoption permitted.

Transfers in January 2013 Can Still Count for 2012

Certain owners of individual retirement accounts (IRAs) have until Jan. 31, 2013, to make tax-free transfers to eligible charities and have them count for tax year 2012.

The American Taxpayer Relief Act of 2012 - enacted Jan. 2, 2013 - extended for 2012 and 2013 the provision authorizing qualified charitable distributions (QCDs), which are transfers from an IRA owned by someone age 70½ or older, directly to an eligible charitable organization. Each year, the IRA owner can exclude from gross income up to $100,000 of these QCDs. This provision had expired at the end of 2011.

The QCD option is available regardless of whether an eligible IRA owner itemizes deductions on Schedule A. Transferred amounts are not taxable and no deduction is allowed for the transfer. However, Indiana has an add back for this transfer; thus, it is taxable for Indiana residents. QCDs are counted in determining whether the IRA owner has met his or her IRA required minimum distributions for the year.

For tax year 2012 only, IRA owners can choose to report QCDs made in January 2013 as if they occurred in 2012. In addition, IRA owners who received IRA distributions during December 2012 can contribute, in cash, part or all of the amounts distributed to eligible charities during January 2013 and have them count as 2012 QCDs.

The Indiana Department of Revenue recently announced significant changes to its sales tax policy regarding sales of optional maintenance and warranty contracts. The policy change was announced via an updated Information Bulletin #2, effective Jan. 1, 2013.

Note: The Department's positions on mandatory maintenance contracts and maintenance contracts related to software have been unchanged by the updated bulletin.

The Department's former policy was to treat optional maintenance and optional warranty contracts the same, imposing tax on the sale of either type of contract when it contained a right to have tangible personal property and there was a reasonable expectation that property would be provided under the contract.

The updated bulletin outlines the following state policies:

1. Redefines warranty contracts to distinguish them from maintenance contracts
2. Specifically states that the substance of the contract overrules its given title
3. Reiterates its policy that maintenance contracts are taxable at the time of sale when it is expected that more than a de minimis amount of tangible personal property will be transferred during the term of the contract
4. Establishes that contract sales meeting the definition of warranty are not taxable transactions

Optional Maintenance Contracts

Maintenance contracts include agreements where, at the time the contract is entered into, tangible personal property is expected to be supplied during the term of the contract. The Department's position per the updated bulletin is that these contracts are taxable bundled transactions unless the tangible personal property component is de minimis (i.e., makes up less than 10 percent of the total value of the transaction). This de minimis test would appear to require parties to quantify the anticipated breakdown between tangible personal property and services at the time the contract is entered into in order to establish whether or not the transaction is taxable. Taxpayers selling taxable maintenance contracts do not pay sales tax on their purchases of items used to fulfill their obligations under the contract.

Optional Warranty Contracts

A warranty contract is defined as "a contract that acts like insurance against future potential repair costs," and consists of agreements where there may never be any tangible personal property or services provided to the customer. The Department's new position per the updated bulletin is that sales of optional warranty contracts are not taxable because it cannot be determined at the time the contract is entered into whether tangible personal property will be transferred. The warranty provider must pay sales or use tax on all purchases of items used to fulfill its obligations under the contract.

The bulletin is silent as to how the Department will treat taxpayers that observed the policies detailed in the information bulletin prior to its issuance. Because the changes articulated in the bulletin are not the result of a law change, taxpayers that have retroactive exposure as a result of the old policies may have newfound support for their position as a result of this revised information bulletin being issued.

For more information, contact Tim Cook or Donna Niesen in Katz, Sapper & Miller's State and Local Tax Practice.

The Internal Revenue Service (IRS) recently announced changes to the Saver’s Credit program, which was established to encourage low- and moderate-income taxpayers to save for retirement.

By providing potential federal income tax credits to these employees, the program encourages more non-highly compensated employees to defer into their retirement plans. The tax credit ranges from 10 to 50 percent of each dollar an employee contributes. Some employees may qualify for the Saver’s Credit if they are deferring based on their individual and/or household income (see chart below).

Tax Credit for Different Income Levels
Adjusted Gross Income 

To qualify for the Saver’s Credit, a participant must be:

• 18 years of age or older
• Not a full-time student
• Not claimed as a dependent on someone else’s return

In addition, they must meet one of the following financial criteria:

• File taxes individually with an income of $29,500 or less
• File taxes as head of household and have income of $44,250 or less
• File taxes jointly with an income of $59,000 or less

As employees will be filing their 2012 tax returns soon, now is the ideal time to remind them of this valuable benefit. Communicating the existence of the Saver’s Credit program could greatly increase the participation rate of low- and moderate-income employees in saving for their retirement.

For questions about qualifying for this program, please refer to IRS Form 8880.

On Jan. 1, 2013, the Senate and then the House passed the American Taxpayer Relief Act of 2012 (Act). President Obama signed the bill into law Jan. 2, 2013. This law averts some of the fiscal cliff tax consequences that were set to expire at the end of 2012.

The Act did not extend the 2% Social Security payroll tax cut that had been in place in 2011 and 2012. Thus, all employee wages below $113,700 will be subject to the full 6.2% Social Security tax rather than the reduced 4.2% that applied in 2011 and 2012. 

The Act did not affect the new Medicare taxes that are effective for 2013 on net investment income and wages and self-employment income over certain thresholds.

Individual Tax Rates

Under the Act, the 39.6% tax rate has been added for individual taxpayers with taxable income over $400,000 and married taxpayers who file jointly with taxable income over $450,000. Projected tax rates for 2013 are as follows:

Single individuals

Married couples filing jointly

Dividend and Capital Gains Rates

The dividend and capital gains tax rate has been increased to 20% for those taxpayers who are in the 39.6% tax bracket. The 15% rate has remained unchanged for taxpayers in the 25%, 28%, 33% and 35% tax brackets. For those taxpayers in the 10% and 15% tax brackets, the dividend and capital gains rate remains at 0%. The rates apply to long-term capital gains only. Short-term capital gains are still taxed at the ordinary income tax rates.

Alternative Minimum Tax (AMT)

The AMT exemption amounts for 2012 have been increased to $50,600 for single taxpayers or taxpayers filing as head of household, $78,750 for taxpayers who are filing married filing jointly and $39,375 for taxpayers who are filing married filing separately. In addition, the AMT exemption amount will be indexed for inflation for years beginning after 2012.

Taxpayers will be allowed to offset their regular tax liability and AMT tax liability by nonrefundable personal credits.

Other Individual Tax Provisions

Below are some of the other individual tax provisions included in the Act.

• The limitation on itemized deductions (also known as the "Pease" limitation) for taxpayers whose adjusted gross income is above certain thresholds has been restored. This limitation reduces the total amount of itemized deductions by 3% of the amount by which the taxpayer’s adjusted gross income exceeds the threshold amounts. Deductions for medical expenses, investment interest, casualty losses and gambling losses are excluded from this limitation. The adjusted gross income thresholds are $300,000 for taxpayers who are married filing jointly; $275,000 for taxpayers who file head of household; $250,000 for taxpayers filing single; and $150,000 for taxpayers who are married filing separate.
• The phase out of personal exemptions (also known as the "Pep" limitation) for taxpayers whose adjusted gross income is above certain thresholds has been restored. Personal exemptions are reduced by 2% for every $2,500 of portion thereof that adjusted gross income exceeds the threshold. The adjusted gross income thresholds are $300,000 for taxpayers who are married filing jointly; $275,000 for taxpayers who file head of household; $250,000 for taxpayers filing single; and $150,000 for taxpayers who are married filing separate.
• The deduction for state and local sales tax in lieu of deducting state and local income taxes has been restored for 2012 and extended to 2013.
• The Act permanently extends the $1,000 child tax credit for dependents under the age of 17.
• Enhancements that were previously made to the earned income tax credit in prior legislation have been extended to 2017.
• The $10,000 adoption tax credit has been permanently extended. In addition the amount of expenses eligible for the credit will be indexed for inflation.
• The child and dependent care credit enhancements have been permanently extended. These enhancements include a top credit amount of 35% and a cap of $3,000 of expenses for one qualifying individual and $6,000 for two or more qualifying individuals.
• The $250 above-the-line deduction for teachers classroom expenses has been restored for 2012 and extended to 2013.
• The provision for excluding up to $2 million on the cancellation of indebtedness on a principal residence has been extended through 2013.
• The ability to deduct mortgage insurance premiums as qualified mortgage interest has been restored for 2012 and extended to 2013.
• The provision allowing for a tax-free distribution from an individual retirement account to public charities for those who are 70 ½ or older has been restored for 2012 and extended to 2013. Special rules apply for distributions made in December 2012 and January 2013.
• The credit for individuals who make energy efficient improvements to an existing residence has been restored for 2012 and extended to 2013. The lifetime maximum credit is $500.
• If a company's plan allows it, an individual may convert a 401(k) account to a Roth 401(k) account. The conversion will be taxable in the year it occurs. This is effective for conversions occurring after Dec. 31, 2012.

Education Incentives

Below are some of the provisions related to education.

• The American Opportunity Tax Credit has been extended through 2017. For qualified taxpayers, the credit is equal to 100% of the first $2,000 of qualified tuition and 25% of the next $2,000 in qualified expense for a maximum credit of $2,500. This credit is available for the first four years of a student's post-secondary education.
• The above-the-line deduction for qualified tuition has been restored for 2012 and extended for 2013.
• The Act permanently extends the suspension of the 60-month rule for the above-the-line deduction for student loan interest. The Act also permanently modifies the adjusted gross income range for the phaseout of the deduction.
• The Act permanently extends the income exclusion of employer provided education assistance of up to $5,250.

Estate and Gift Tax Provisions

The following provisions related to estate and gift taxes are included in the Act:

• The estate tax rate is permanently extended to 40% for the estates of decedents dying after Dec. 31, 2012. The gift tax rate is also extended to 40% for gifts made after 2012.
• The lifetime exclusion amount for estate and gift taxes is $5 million and is adjusted annually for inflation. The exclusion amount for 2012 is $5.12 million.
• The Act permanently extends the portability between spouses of any unused lifetime exclusion.

Depreciation Provisions

The following provisions related to depreciation are included in the Act:

• For 2012 and 2013, the Section 179 expensing dollar limit is $500,000. The investment limitation is $2 million.
• The Act extends 50% bonus depreciation through Dec. 31, 2013.
• 15 year straight line depreciation has been extended through Dec. 31, 2013 for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements.

Selected Business Provisions

Below are selected provisions that affect business taxpayers.

• The research credit has been restored for 2012 and extended for 2013. The Act also added modifications for businesses under common control and situations where there is a change in ownership.
• The Work Opportunity Tax Credit has been restored for 2012 and extended for 2013.
• For S corporations, the rules related to basis adjustments for charitable contributions of property have been restored for 2012 and extended for 2013.
• The reduced 5 year recognition period for S corporation built-in gains tax has been restored for 2012 and extended for 2013.
• The 100% capital gain exemption for qualified business stock has been restored and extended for stock acquired prior to Jan. 1, 2014.
• The Alternative Fuel and Alternative Fuel Mixture Credit has been restored for 2013 and extended for 2013. This includes propane used in forklifts.

The above provides an overview of many of the provisions of the American Taxpayer Relief Act of 2012. Please contact your KSM advisor for more information. 

The IRS has announced the 2013 cost-of-living adjustments (COLAs) for retirement plans. Many of the limits pertaining to pension and other retirement plans are changed for 2013. Significant changes are as follows:

Elective Deferrals: The dollar limit for Section 401(k) plans, Section 403(b) plans and most 457 plans increase to $17,500 (up from $17,000), or $23,000 if over 50 and the plan adopts catch-up provisioning.

Defined Benefit Plan: The limitation on the annual benefit under a defined benefit plan is increased to $205,000 (up from $200,000). Plan provisions must preclude the possibility that any annual benefit that exceeds the limitations will be payable at any time. Further, the plan provisions (including the provisions of any annuity) generally must preclude the possibility that any annual benefit exceeding these limitations will be accrued, distributed, or otherwise payable in any optional form of benefit (including the normal form of benefit) at any time from the plan.

Annual Compensation Limit: The maximum amount of annual compensation that can be taken into account for various qualified plan purposes is increased to $255,000 (up from $250,000). For example, if an employer provides an annual contribution equal to 5% of salary under a qualified plan, an employee with a salary of $260,000 will have $12,750 contributed to his account ($255,000 * 5%).

Defined Contribution Plan: The limit on the annual additions to a participant's defined contribution account is increased to $51,000 (up from $50,000). The amount that can be allocated during a limitation year (typically the calendar year unless the plan provides otherwise) as an "annual addition" to a participant's account in a defined contribution plan is limited to the lesser of $51,000 or 100% of compensation.

IRA Contribution Limit: Increases to $5,500 (up from $5,000), or $6,500 if over 50 and the plan adopts catch-up provisioning. The due date for making a 2012 contribution is April 15, 2013. In order to make a contribution, the individual must have earned income and be under age 70 ½ at the end of the year.

SIMPLE Accounts: The maximum amount of compensation an employee may elect to defer for a SIMPLE plan is increased to $12,000 (up from $11,500), or $14,500 if over 50 and plan adopts catch-up provisions. An employer can either match employee elective deferrals dollar for dollar up to 3% of wages, or contribute 2% of wages (up to $255,000).

Standard Mileage Rates for 2013

The IRS has issued 2013 optional standard mileage rates used to calculate the deductible costs of operating automobile for business, charitable, medical or moving purposes. Beginning Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 56.5 cents per mile for business miles driven
• 24 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations