President Obama signed the American Taxpayer Relief Act of 2012 into law on January 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.
The most obvious areas of complexity for many of our clients will be understanding the impact on them of the various thresholds. For instance:
Individual Tax Rate
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:
|If taxable income is:||The tax will be:|
|Not over $8,925||10%|
|Over $8,925 but not over $36,250||$892.20 plus 15% of the excess over $8,925|
|Over $36,250 but not over $87,850||$4,991.25 plus 25% of the excess over $36,250|
|Over $87,850 but not over $183,250||$17,891.25 plus 28% of the excess over $87,850|
|Over $183,250 but not over $398,350||$44,603.25 plus 33% of the excess over $183,250|
|Over $398,350 but not over $400,000||$115,586.25 plus 35% of the excess over $398,350|
|Over $400,000||$116,163.75 plus 39.6% of the excess over $400,000|
Married couples filing jointly
|If taxable income is:||The tax will be:|
|Not over $17,850||10%|
|Over $17,850 but not over $72,500||$1,785 plus 15% of the excess over $17,850|
|Over $72,500 but not over $146,400||$9,982.50 plus 25% of the excess over $72,500|
|Over $146,400 but not over $223,050||$28,457.50 plus 28% of the excess over $146,400|
|Over $223,050 but not over $398,350||$49,919.50 plus 33% of the excess over $223,050|
|Over $398,350 but not over $450,000||$107,768.50 plus 35% of the excess over $398,350|
|Over $450,000||$125,846 plus 39.6% of the excess over $450,000|
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
- 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 teacher’s 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.
- 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 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.
- 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
- 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 Saville, Dodgen & Company tax advisor for more information.