The fiscal cliff has seemingly been averted, at least temporarily. The recently enacted 2012 American Taxpayer Relief Act signed by President Obama January 2, 2013 is a sweeping tax package. It includes, among many other things, “permanent” extension of Bush-era tax cuts for most taxpayers, revised tax rates on ordinary and capital gain income for high-income individuals, modification of the estate tax, “permanent” relief from the alternative minimum tax for individual taxpayers, limits on the deductions and exemptions of high-income individuals, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses. Here’s a look at some of the key elements of the new law that may affect you:
Tax rates. For tax years beginning after 2012, the 10%, 15%, 25%, 28%, 33% and 35% tax brackets from the Bush-era tax cuts will remain in place and are made permanent. This means that, for most of you, the tax rates will stay the same. However, there will be a new 39.6% rate, which will begin at the following thresholds: $400,000 (single), $425,000 (head of household), $450,000 (joint filers and qualifying widow(er)s), and $225,000 (married filing separately). These dollar amounts will be inflation-adjusted for tax years after 2013.
Estate tax. The new law prevents steep increases in estate, gift and generation-skipping transfer (“GST”) taxes that were slated to occur if you died or made gifts after 2012 by “permanently” keeping the exemption level at $5 million, as indexed for inflation. However, the new law also permanently increases the top estate, gift, and GST tax rate from 35% to 40%. It also continues the portability feature for you married couples, that allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse. All changes are effective if you die or made gifts after 2012.
Capital gains and qualified dividends rates. The new law retains the 0% tax rate on long-term capital gains and qualified dividends, modifies the 15% rate, and establishes a new 20% rate. Beginning in 2013, the rate will be 0% if your income falls below the 25% tax bracket; 15% if your income falls at or above the 25% tax bracket but below the new 39.6% rate; and 20% if your income falls in the 39.6% tax bracket. It should be noted that the 20% top rate does not include the new 3.8% surtax on investment-type income and gains for tax years beginning after 2012, which applies on investment income above $200,000 (single) and $250,000 (joint filers) in adjusted gross income. So actually, the top rate for capital gains and dividends beginning in 2013 will be 23.8% if your income falls in the 39.6% tax bracket. The tax will be 0%, 15%, or 18.8% if your income is at one of the lower levels.
Personal exemption phaseout. Beginning in 2013, your personal exemptions will be phased out (i.e., reduced) if your adjusted gross income is over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers). You can generally claim exemptions for yourself, your spouse and your dependents. Last year, each exemption was worth $3,800.
Itemized deduction limitation. Beginning in 2013, your itemized deductions will also be limited when your adjusted gross income is over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers).
Alternative Minimum Tax relief. The new law provides permanent alternative minimum tax (“AMT”) relief. Prior to the Act, your individual AMT exemption amounts for 2012 were to have been $33,750 for unmarried taxpayers, $45,000 for joint filers, and $22,500 for married persons filing separately. Retroactively effective for tax years beginning after 2011, the new law permanently increases these exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. In addition, for tax years beginning after 2012, these exemption amounts are indexed for inflation.
Tax credits for low to middle wage earners. The new law extends for five years the following items that were originally enacted as part of the 2009 stimulus package and were slated to expire at the end of 2012: (1) the American Opportunity tax credit, which provides up to $2,500 in refundable tax credits for undergraduate college education; (2) eased rules for qualifying for the refundable child credit; and (3) various earned income tax credit changes.
Cost recovery/Depreciation. The new law extends increased expensing limitations and treatment of certain real property as Code Section 179 property. It also extends and modifies the bonus depreciation provisions with respect to property placed in service after December 31, 2012, for tax years ending after that date.
Tax break extenders. Many of the “traditional” tax extenders are extended for two years, retroactively to 2012 and through the end of 2013. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes, the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers, IRA charitable contribution and the research credit.
Pension provision. For transfers after December 31, 2012, for tax years ending after that date, an applicable retirement plan (which includes a qualified Roth contribution program), may have provisions which allow you to elect to transfer amounts to designated Roth accounts with the transfer being treated as a taxable qualified rollover contribution.
Payroll tax holiday is over. If you are currently employed, your 2% employee share of Social Security payroll tax cut you have enjoyed for the last two years was not extended and expired at the end of 2012. This would mean if you are earning $35,000 in 2013, your taxes will increase by $700.
We will be covering some of these provisions more in depth in the coming weeks. Although the new law has been touted as taxpayer relief, it is only a relief from what could have been. For most American taxpayers, your taxes are going up in 2013 over what they were in 2012. Yippee!!
By: Matthew M. Wallace, CPA, JD
Published edited January 13, 2013 in The Times Herald newspaper, Port Huron, Michigan as: Is 2012 American Taxpayer Relief Act really a relief?