American Taxpayer Relief Act of 2012

As you have been seeing on the news, the U.S. House of Representatives and U.S. Senate passed a bill, (The American Taxpayer Relief Act of 2012 but commonly referred to as “fiscal cliff legislation”) which was signed into law by President Obama on Thursday. This legislation (effective January 1, 2013 with some provisions retroactive for 2012) has many parts to it but a summary of those related to “taxes” are as follows:

Permanent change for tax rates beginning January 1, 2013
A top rate of 39.6% (up from 35%) will be imposed on individuals making more than $400,000 a year, $425,000 for head of household, $450,000 for married filing jointly, and $225,000 for married filing separately. These brackets will be inflation adjusted after 2013.

2% Social Security reduction for employees and self-employed individuals is gone

AMT permanently patched
A permanent AMT patch, adjusted for inflation, will be made retroactive to 2012. 2012 exemption amounts are $50,600 for unmarried, $78,750 for Married filing joint and $39,375 for married filing separate.

Dividends and capital gains
The maximum capital gains tax will rise from 15% to 20% for individuals taxed at the 39.6% rates (those making $400,000, $425,000, $450,000, or $225,000 depending on filing status, as noted above). There will also be the 3.8% Obamacare Surtax which becomes effective on 1/1/13 for capital gains and other investment income.

Itemized deduction and personal exemption phase-outs
The itemized deduction phase-out is reinstated, and personal exemption phase-out is reinstated, but with higher AGI starting thresholds (adjusted for inflation): $300,000 for married filing joint, $275,000 for head of household, $250,000 for single, and $150,000 for married filing separately.

Estate tax
The estate tax will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples) but the rate above the $5,000,000 exemption will be applied at a higher 40% rate (up from 35% in 2012). The 2012 amount is $5,120,000.

Personal tax credits
The $1,000 Child Tax Credit is permanent, but the enhanced Earned Income Tax Credit, and the enhanced American Opportunity Tax Credit will all be extended through 2017. (The provision that reduces the earnings threshold for the refundable portion of the Child Tax Credit is only extended to 2017.)

Other personal deductions and exclusions
The following deductions and exclusions are extended through 2013:

Discharge of qualified principal residence exclusion;

  • $250 above-the-line teacher deduction;
  • Mortgage insurance premiums treated as residence interest;
  • Deduction for state and local taxes;
  • Above-the-line deduction for tuition; and
  • IRA-to-charity exclusion (plus special provisions allowing transfers made in January 2013 to be treated as made in 2012).
  • Business provisions

  • The Research Credit and the production tax credits, among others, will be extended through 2013;
  • 15-year depreciation and §179 expensing allowed on qualified real property through 2013;
  • Work Opportunity Credit extended through 2013;
  • 50% bonus depreciation extended through 2013; and
  • The §179 deduction limitation is $500,000 with a $2 million investment limit for 2012 and 2013.

    Once we have reviewed the full bill, we will be providing additional information on the specific parts and how they will affect income and estate taxes and planning going forward.
    Please call any partner or manager if you have any immediate questions.

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