American Taxpayer Relief Act of 2012
On January 1, 2013, the Senate and the House passed the American Taxpayer Relief Act of 2012 (“Act”). The President signed the Act into law on January 2, 2013. Final passage of the Act prevented tax increases to most Americans that would have gone into effect automatically upon the expiration of the so-called “Bush Tax Cuts” on December 31, 2012, as well as massive spending cuts required by the sequestration process. The Act accomplishes this in part by making “permanent” the tax relief, for certain taxpayers, provided in The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and The Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”) The following are some of the key provisions of the Act:
Income Tax Rates. Upon the expiration of the Bush Tax Cuts, the income tax brackets for individuals were scheduled to increase from 10%, 15%, 25%, 28%, 33% and 35% to 15%, 28%, 31%, 36% and 39.6% on January 1, 2013. The Act maintains the lower rates, but adds a new 39.6% bracket for taxable income (not adjusted gross income) in excess of the “applicable threshold.” The applicable threshold is $450,000 for joint filers and surviving spouses, and $400,000 for single filers. These dollar amounts are adjusted for inflation for tax years after 2013.
Capital Gain and Dividend Rates. For tax years beginning after 2012, the top rate for capital gains and dividends will rise from 15% to 20% for taxpayers with taxable income (not adjusted gross income) exceeding the applicable threshold amounts listed above. For taxpayers with ordinary income taxed at a rate below 25%, capital gains and dividends will be taxed at a 0% rate. Taxpayers who are subject to a 25% or greater rate on ordinary income but whose income levels fall below the applicable threshold amounts will continue to be subject to a 15% rate on capital gains and dividends.
Personal Exemption Limitations. The Act phases out personal exemptions for certain high income taxpayers. For tax years beginning in 2013, the total amount of personal exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer’s adjusted gross income exceeds the applicable threshold. These dollar amounts are adjusted for inflation for tax years after 2013. The applicable threshold for the personal exemption phase out starts for those making $300,000 for joint filers and $250,000 for single filers.
Itemized Deduction Limitations. The Act phases out itemized deductions for certain high income taxpayers. For tax years beginning in 2013, the total amount of their itemized deductions is reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. These dollar amounts are adjusted for inflation for tax years after 2013. The applicable threshold for the itemized deduction phase out starts for those making $300,000 for joint filers and $250,000 for single filers.
Estate and Gift Taxes. The applicable exclusion amount was scheduled to be significantly reduced from $5,000,000 in 2012 to $1,000,000 in 2013 if the Bush Tax Cuts were allowed to expire. The maximum estate tax rate would have also automatically increased from 35% in 2012 to 55% in 2013. The Act keeps the applicable exclusion amount at $5,000,000 for estates and gift in 2013 (as indexed for inflation thereafter). The Act increases the top estate and gift tax rate to 40%. The Act also continues the concept of portability that allows the estate of the first spouse to die to transfer his or her unused exclusion amount to the surviving spouse.
AMT Relief. Without the Act, the alternative minimum tax (“AMT”) was expected to affect many taxpayers in 2012 and thereafter. AMT is the excess, if any, of the tentative minimum tax for the year over the regular tax for the year. Prior to the Act, the individual AMT exemption amounts for 2012 were scheduled to be $33,750 for single filers and $45,000 for joint filers. Retroactively for tax years beginning after 2011, the Act increases these exemption amounts to $50,600 for single filers and $78,750 for joint filers. For tax years beginning after 2012, the Act indexes these exemption amounts for inflation.
Extension of Increased 179 Deduction and 50% Bonus Depreciation. The following depreciation provisions are retroactively extended by the Act through 2013: (1) 50% federal bonus depreciation; (2) 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements; and (3) $500,000 of increased expensing limitations and treatment of certain real property as Code 179 property.
Miscellaneous Provisions. The Act also extended numerous other miscellaneous deductions and tax credits. For example, the New Markets Tax Credit and the Work Opportunity Tax Credit were retroactively extended for two years through 2013.
In summary, the Act keeps income and capital gains rates the same for most taxpayers with taxable income below the applicable threshold amounts. However, most taxpayers will still see an increase in their overall taxes in 2013 as a result of the expiration of the payroll tax cut of 2% that was in place in 2011 and 2012, as well as the additional 3.8% tax on certain investment income imposed by the Affordable Care Act beginning in 2013. There will also be a new 0.9% additional Medicare tax beginning in 2013 on wages and self-employment income exceeding $250,000 for joint filers and $200,000 for single filers. Finally, although the Act labels these tax law changes as “permanent,” Congress may not be finished making changes to the Internal Revenue Code in 2013. The Act postpones until March 1, 2013, the massive spending cuts that will automatically go into effect under the sequestration process. Some Congressmen have already hinted that further tax increases on “wealthy” taxpayers may still be needed. Whether this is accomplished by further tax increases or further phase-outs or reductions of certain deductions is left to be seen. Stay tuned.
As always, please consult your CPA or tax advisor on how the Act’s provisions affect your particular tax return.