American Taxpayer Relief Act of 2012
The Senate and House of Representatives passed the American Taxpayer Relief Act of 2012 (the “Act”) on January 1, 2013. The bill is heading for the President’s desk today for signature. The Act addresses a partial resolution to the “fiscal cliff” matter primarily covering tax relief and more permanent extension of some of the Bush tax cuts. We have summarized some of the major provisions included in the Act below. Please note that these are highlights of the Act and are not to be considered a complete analysis of the provisions.
Tax rates were scheduled to increase in 2013 for all income brackets. However, with the passing of the Act, the lower income tax brackets remain the same as 2012. The only change involves the highest income bracket. Taxpayers who have taxable income over $400,000 single, $450,000 married filing jointly and $425,000 head of household are taxed at 39.6% on their income above the threshold levels. All other income tax brackets remain the same (10%, 15%, 25%, 28%, 33% and 35%).
Capital Gains and Dividend Rates:
Capital gains and dividend rates will increase for taxpayers exceeding taxable income of $400,000 single and $450,000 married filing joint. The capital gains for these taxpayers will be subject to a tax rate of 20% (up from 15%) and a 3.8% Medicare surtax for a total overall rate of 23.8%.
Under current law, the capital gains and dividend rate for taxpayers below the 25% tax bracket is equal to zero percent. This provision has been extended. For taxpayers taxed at or above the 25% bracket, but below the threshold amounts described above, the capital gains rate remains unchanged at 15%. However, these taxpayers may be subject to the 3.8% Medicare surtax on some or all of their investment income.
Personal Exemption Phase-out:
Personal exemptions will be phased out at the rate of 2% for each $2,500 of Adjusted Gross Income (AGI) over certain threshold amounts. The phase-out will begin if AGI is over $250,000 for a single taxpayer, $300,000 for married taxpayers filing jointly and $275,000 for head of household.
Itemized Deduction Reduction:
Itemized deductions will be reduced by the lessor of (1) 3% of the excess over the threshold amount (below) or (2) 80% of allowable deductions. The reduction cannot exceed 80% of the otherwise allowable itemized deductions. The reductions will begin if AGI is over $250,000 for a single taxpayer, $300,000 for married taxpayers filing jointly and $275,000 for head of household.
Alternative Minimum Tax (AMT):
The Act creates increased AMT exemption amounts of $50,600 for single taxpayers and $78,750 for taxpayers filing jointly. These changes would permanently index the AMT exclusion to inflation and avoid the annual “patch” that was required to prevent it from impacting middle-class taxpayers. In addition, the Act creates an allowance for taxpayers to offset AMT liability with nonrefundable credits (adoption, child, saver’s, residential energy efficient property). Before the Act, only regular tax liability could be offset by the credits.
Major Items Extended by the Act:
- American opportunity credit – extended for 5 years
- Deductible educator expenses – extended through 2013
- Discharge of qualified principal residence indebtedness – extended through 2013
- Deductibility of mortgage insurance premiums – extended through 2013
- Deductibility of State and local general sales taxes – extended through 2013
- Tuition and related expense deduction (above –the –line deduction)– extended through 2013
- Special rules for contributors of capital gain real property made for conservation purposes – extended through 2014
- Tax-free distributions from individual retirement plan for charitable purposes – extended through 2014.
- Various depreciation provisions modified and extended; Section 179, bonus depreciation, 15-year depreciation on leaseholds for qualified restaurants, etc. – extended through 2014
- R&D Credit – extended through 2013 (includes 2012 retroactive as well)
- Exclusion of 100% gain on small business stock under Section 1202 stock acquired before January 1, 2014
- Work Opportunity Tax Credit- extended through 2013 (for new hires of one of eight targeted groups)
- Reduction in S Corporation recognition period for built-in-gains tax under Section 1374(d)7 is extended through 2013 with a ten-year period.
- Various other provisions related to low-income communities, mining, railroad, military personnel, etc.
Energy Related Provisions:
- Credits for energy-efficient new homes and energy efficient appliances are retroactively extended for two years through 2013.
- Non-business energy property for energy-efficient existing homes is retroactively extended for two years through 2013. Taxpayers can claim a 10% credit on the cost of qualified energy efficient improvements and residential energy property expenditures subject to various lifetime credit limits.
- Various other energy related items (alternative fuel, plug-in electric, biodiesel, etc.)
Estate Tax Considerations:
The Act keeps the lifetime exemption level at $5 million for estate, gift, and generation skipping transfer taxes. The Act makes permanent the unification of estate and gift taxes, creating a single graduated rate for both. In addition, the Act continues the allowance of portability of the lifetime exclusion between spouses. Finally, the Act increases the top estate tax rate from 35% to 40%.
Please note this is not a comprehensive summary. To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.