On January 1, 2013 the U.S. Senate passed the American Taxpayer Relief Act by a vote of 89 to 8. Later that same day, the House followed suit and approved the bill by a vote of 257 to 167. The President signed the bill today, January 3, 2013.
The Act allows the Bush-era tax cuts to expire after 2012 on higher income taxpayers while generally allowing them to remain on taxpayers with taxable income under $400,000.
Highlights of the major tax provisions are as follows:
- The Act leaves the lower Bush-era income tax rates for all, except for taxpayers with taxable income above $400,000 ($450,000 for married taxpayers, $425,000 for heads of households). Income above these levels will be taxed at a 39.6% rate (up from 35%).
- The two-percentage-point reduction in payroll taxes, commonly known as the Social Security tax, will be allowed to expire.
- The higher exemption amounts for alternative minimum tax (AMT) - the so-called "patch"- are made permanent, resulting in an estimated 30 million taxpayers escaping being subject to the AMT.
- The dividend and capital gain tax rates are increased to 20% (up from 15%) for individuals making at least $400,000 ($450,000 for joint returns). Generally, all other taxpayers will continue to enjoy a dividend and capital gain tax rate of 15% (in some cases this could be a 0% rate). These rates do not include the additional 3.8% surtax passed under the Patient Protection and Affordable Care Act. The surtax will apply to the extent that income exceeds $200,000 for single filers, $250,000 for joint filers and $125,000 for married filing separately. This could effectively raise the maximum rate to 23.8% on dividends and long term capital gain and 43.4% on short term capital gain.
- The Personal Exemption Phase-Out (PEP) is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 for married taxpayers filing separately. Total exemptions will be reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer's adjusted gross income (AGI) exceeds the applicable threshold.
- The "Pease" limitation on itemized deductions is reinstated with a threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 for married taxpayers filing separately. Itemized deductions will be reduced by 3% of the amount by which the taxpayer's AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions.
Estate, Gift, and Generation-Skipping Transfer (GST) Tax
- The $5 million dollar estate, gift, and GST tax exemption has been extended for individuals dying and gifts made after 2012.
- The top estate, gift, and GST rate is increased from 35% to 40%.
- The Act also provides for portability between spouses of the $5 million exemption.
- The Act extends through 2013 the Code Sec. 41 research tax credit, the Code Sec. 199 domestic production activities deduction, and the Work Opportunity Tax Credit.
- The Sec. 179 depreciation deduction is extended through 2013. The Sec. 179 dollar limit for 2012 and 2013 is $500,000 with a $2 million investment cap.
- The 50% first-year bonus depreciation is extended through 2013. Generally, it applies to property placed in service before Jan.1, 2014 (Jan.1, 2015 for certain property with longer production periods).
We have only listed the most applicable highlights of The American Taxpayer Relief Act. The Act contains a number of other changes that may significantly affect your tax liability in a variety of ways. If you would like more detailed information about the provisions of the Act, please contact us. We will work with you to help you determine how the Act will affect your tax liability and what you should do to take full advantage of the Act.
Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.