Updated: Sep 6, 2022
Have you heard of the American Taxpayer Relief Act of 2012? Many owner-operators have heard of it, but how many actually understand it? Taxes and tax codes can be very dry and hard to understand for the average American. In this article, ATBS will shed some light on the American Taxpayer Relief Act of 2012 (also referred to as "ATRA"), as well as help you understand some of the benefits that come from it. As we get started, we'll give some background reasons for the ATRA being enacted, and we'll wrap up with some tax saving suggestions.
The American Taxpayer Relief Act of 2012 was enacted January 1, 2013. This act helped to resolve many of the issues that were being discussed in the press at the time of the “Fiscal Cliff” and created some permanent fixes for several tax issues. Over the past several years, many of the items composing the Fiscal Cliff had been extended, but the long term existence was always unknown. The ATRA solidified many of the provisions that had been regularly granted “temporary” extensions, and added inflationary measures to make sure tax provisions intended for higher income earners would not impact the middle class, including owner-operators.
One of the most significant actions taken by the ATRA was to permanently “fix” the Alternative Minimum Tax provisions. While this tax may not impact most of the clients at ATBS, this tax was an ever-looming issue for all of us, as it required annual “patches” to increase the tax thresholds for inflation. AMT was created in 1969 to place a tax on higher income households that were using deductions and other special tax benefits to reduce their tax liabilities to nearly no tax. It was modified in 1982 to its present form – a completely parallel taxing system intertwined with regular income tax. The tax calculates an alternative tax at a higher income tax rate, removing many deductions most families utilize on their Schedule A Itemized Deductions – such as property tax, mortgage interest, home equity interest, medical expenses, charitable donations, home sale gain and loss provisions, and forgiveness of debt provisions. The income tax owed is either the regular income tax, or tax calculated by the alternative method – whichever is higher.
The temporary patches enacted by Congress in prior years would annually modify the allowances before AMT would begin to tax, but never fully corrected the tax. This failure to correct the law was causing significantly more households to be impacted by AMT. Without permanent changes to the law including inflationary measures, the number of Americans who would be subject to the tax would continue to increase. The ATRA not only corrected the tax, but included provisions for the tax to be indexed for inflation.
Since the AMT identified many tax provisions that can impact each of us – let’s discuss some of these provisions and provide you with some tax planning suggestions:
Property tax deduction: This is a deduction that many people utilize to help reduce their taxes with some simple planning. Property taxes may be “prepaid” for a future year in order to benefit the present tax year. If you know you may have increased deductions for the present year, plan to prepay your property taxes so you can enhance the deduction benefit.
Mortgage Interest & Home Equity Interest deductions: If you are planning on making a significant purchase in the year, you may want to utilize equity in your home to finance the purchase and gain the benefit of deducting the interest. Frequently this results in lower interest rates as the loan is secured by the property, and you are able to deduct the interest expense as a deduction. For example, if you were to purchase a $20,000 car with a 5-year note 9% interest rate, or take out an equity loan on your home for the same amount and interest rate, either way you would pay $1,665 in interest. If you use the home equity line to finance the purchase and you are in the 15% tax bracket, you would save $250 in taxes per year. If you are in the 25% tax bracket, you would save $416. Consult your tax professional to see if this may be wise for you before making this decision.
Medical deduction and Healthcare expenses: Medical deductions can be used as an effective tool to reduce taxable income when they are bunched together. Some strategies for using this effectively may be to pull medical treatments all into one year benefiting from having your medical insurance deductible paid, but also combining all out of pocket expenses in a single year. Another strategy to utilize this deduction is when medical expenses fall in the fourth quarter – pay on installment, then pay in full the following year additionally scheduling any medical treatments so you can maximize your ability to deduct. There are numerous other opportunities for tax savings, such as utilizing a Health Savings Account, or a Flexible Spending Account. Consult your tax professional to formulate a good tax strategy.
Charitable donations: This deduction is one that is frequently overlooked. Be sure to write out details on the receipt provided of the items you gave when donating goods. Charitable organizations publish charts of suggested pricing for you to use when calculating your donations of goods that may be very helpful in determining value. When giving to a charity, write a check. It not only provides greater security for the funds not being misappropriated, it helps you to document your charitable giving and guarantees a receipt. Many small donations can add up to a large deduction. Consult your tax advisor for advice on charitable giving.
Other Itemized Deductions: Owner-operators have a number of deductions that can help lower taxes, such as: Per Diem, gas, maintenance, uniform, satellite radio, mobile phone, ATM fees, etc.
The American Taxpayer Relief Act helped Americans to have permanent tax provisions that they can plan tax strategies and life events to control their tax expense. ATBS helps owner-operators stay informed of tax law changes, and applies tax law changes to reduce tax burden. Please consult your tax advisor to develop you own tax strategy customized to your individual needs.