American Taxpayer Relief Act

The fiscal cliff was averted on January 1, 2013 with the passage of the American Taxpayer Relief Act of 2012 (Act) which was signed by President Obama on January 2, 2013.  The new law eliminates the “sunset” provisions of the 2001 and 2003 tax cuts, offering an increased degree of stability even with the tax increases on some higher income and net worth individuals. Below is a summary of the many tax provisions within the Act.

Estate and Gift Tax:

The federal estate tax is permanently modified to apply to estates in excess of $5,000,000, (indexed for inflation).  The tax rate was increased from 35% to 40% .

The gift and GST tax is also permanently modified to apply to gifts and generation skipping transfers in excess of $5,000,000 (indexed for inflation). The tax rate was increased from 35% to 40%.

Spousal portability which allows surviving spouses to use the unused exemption of a predeceased spouse is now permanent.

Income Tax Rates: 

The federal income tax rates for individuals with incomes less than $400,000 and joint filers with income less than $450,000 will remain as they were under the prior law.  Individuals with income in excess of $400,000 and joint filers with income in excess of $450,000 will have a federal income tax rate of 39.6%.  The tax on dividends and long term capital gain will also increase to 20% for these taxpayers.  Also, the additional net investment income tax enacted as part of the Patient Protection and Affordable Care Act will apply for individuals with income in excess of $200,000 and joint filers with income in excess of $250,000, resulting in a maximum long term capital gains tax and qualified dividend rate of 23.8%.

Marriage Penalty Relief:

The 15% bracket for married individuals filing jointly is permanently set at 200% of the amount for individual filers.
Social Security Payroll Tax:

The payroll tax holiday in effect for the past two years expired on January 1, 2013 and an employee’s portion of the social security payroll tax will increase by 2% from 4.2% to 6.2%.

Exemptions and Itemized Deductions:

The phase out of personal exemptions and the limitation on itemized deductions was reinstated for individuals with adjusted gross income exceeding $250,000 and joint filers with adjusted gross incomes exceeding $350,000.  Now personal exemptions are reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer’s income exceeds the threshold and itemized deductions are reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds the applicable threshold to a maximum reduction of 80%.

Alternative Minimum Tax:

The alternative minimum tax is now permanently indexed for inflation.

Education Incentives:

Many education incentives were made permanent such as the student loan interest deduction, enhancements to Coverdell education accounts (also known as the Educational IRAs), exclusion from income of employer provided education assistance and exclusion from income of certain scholarships.

Temporary Provisions:

Section 179 – Section 179 of the tax code permits businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during a tax year instead of depreciating such qualifying equipment and/or software over a period of years.  The increased Section 179 deduction limits applicable to small business will be extended through 2013.

Business – Various business tax cuts will be extended, including a one-year extension of 50% bonus depreciation, 15 year recovery period for leasehold improvements, research credits and work opportunity credits.

Individual – Various individual tax cuts will be extended including deductions for state and local sales taxes, qualified tuition expenses, $100,000 tax free distributions from IRAs to charities for certain taxpayers and mortgage insurance premiums.