Tax Law Updates - The American Taxpayer Relief Act of 2012 (the Act)
On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 (the Act) into law. The Act is primarily a permanent extension of the 2001/2003 Bush-era income tax rates for the overwhelming majority of taxpayers.
The following is a summary of pertinent individual provisions:
Estate and Gift Tax: The Act made permanent the unification of the estate, gift, and generation-skipping tax rate structure; thus, the unified federal estate and lifetime gift tax exclusion amount — the amount a taxpayer may transfer without incurring estate, gift or generation-skipping taxes — is $5,000,000, adjusted for inflation after 2011. The 2012 amount was set at $5,120,000. Distributions exceeding the exclusion are subject to a graduated tax regime with a 40% maximum rate (which is an increase from the previously 35% rate). Further, the Act also made permanent the so-called “portability” provision. If a spouse dies after 2011 without exhausting his or her estate and lifetime gift tax exclusion amount, the surviving spouse may be able to use that amount if certain filing requirements are met. Finally, the Act made permanent the deduction for state estate taxes, the repeal of the qualified family-owned business interest deduction and certain conservation easement rules.
Income Tax Rates: The Act makes permanent the 10%, 15%, 25%, 28%, 33%, and 35% marginal income tax rates for married taxpayers filing joint returns with taxable income (TI) of $450,000 or less, heads of household with TI of $425,000 or less, unmarried taxpayers with TI of $400,000 or less, and married taxpayers filing separate returns with TI of $225,000 or less.
The Act creates a seventh income tax rate bracket, raising the top tax rate to 39.6% on TI over $450,000 for married taxpayers filing joint returns, TI over $425,000 for heads of household, TI over $400,000 for unmarried taxpayers, and TI over $225,000 for married taxpayers filing separate returns. These amounts will be indexed for inflation in tax years beginning after 2013.
Capital Gains and Qualified Dividends Tax Rates: The Act makes permanent the current capital gains and qualified dividends rates of 0% for taxpayers in the 10% and 15% income tax brackets, and 15% for taxpayers in the 25%, 28%, 33%, and 35% income tax brackets.
Alternative Minimum Tax Relief: The Act provides permanent AMT relief after 11 years of temporary patches designed to prevent the tax from affecting lower-income taxpayers. The Act makes permanent the AMT patch provision allowing all of the nonrefundable personal credits to be taken to the full extent of both regular tax and AMT liability. The Act also sets increased exemption amounts for 2012 and provides for inflation adjustments beginning in 2013. For married taxpayers filing jointly or surviving spouses, the Act sets the AMT exemption amount to $78,750 for tax years beginning in 2012. For individuals who are not married and are not surviving spouses, the Act sets the AMT exemption amount to $50,600, and for married taxpayers filing separate returns, the AMT exemption amount is set at $39,375 (1/2 the amount of married taxpayers filing jointly) for tax years beginning in 2012.
Phaseout of personal exemptions: The Act reinstates the personal exemption phaseout, but only for married couples filing joint returns with adjusted gross income (AGI) above $300,000, heads of household with AGI above $275,000, unmarried individuals with AGI above $250,000, and married taxpayers filing separate returns with AGI above $150,000. These amounts will be indexed for inflation in tax years beginning after 2013.
Overall limitation on itemized deductions: The Act reinstates the overall limitation on itemized deductions, but only for married couples filing joint returns with AGI above $300,000, heads of household with AGI above $275,000, unmarried individuals with AGI above $250,000, and married taxpayers filing separate returns with AGI above $150,000. These amounts will be indexed for inflation in tax years beginning after 2013.
Child Tax Credit: The Act extends permanently the $1,000 credit amount (not adjusted for inflation), as well as special relief for taxpayers with three or more qualifying children. Other modifications that were made to the child tax credit by the 2001, 2003, and 2009 Acts, such as the expansion of its refundability, are extended as well. The Act extends the $3,000 earnings threshold for the refundable portion of the credit for five years, through 2017.
Earned Income Tax Credit: The Act extends for five years, through 2017, Bush-era and later modifications to the earned income credit, including the 45% credit percentage and reduction of marriage penalty for taxpayers with three or more qualifying children.
• Dependent care credit.
• Adoption credit (and exclusion from income of employer-provided adoption assistance).
• Employer-provided child care credit.
• The $250 above-the-line deduction for professional expenses incurred by elementary and secondary school teachers.
• The above-the-line deduction for up to $4,000 of qualified tuition and related expenses.
• The exclusion from taxable income of debt forgiven in a foreclosure proceeding or write-down of principal on qualified principal residence indebtedness.
• The equalized exclusion from income for employer-provided mass transit and parking benefits.
The inflation-adjusted amount for 2012 is $240 per month.
• Treatment of mortgage insurance premiums as qualified residence interest.
• The deduction for state and local general sales taxes in lieu of state and local income taxes.
• Increased ($2,000) contribution amount to Coverdell education savings accounts and expanded definition of education expenses to include elementary and secondary school expenses.
• Exclusion of up to $5,250 per year of employer-provided education assistance, including graduate-level courses.
• Elimination of 60-month limit, and increase in income limitation to $65,000 ($130,000 for joint filers) plus inflation adjustment, on student loan interest deduction.
• Exclusion of certain amounts received under the National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program.
• Increased ($15 million) arbitrage rebate exception for governmental bonds used to finance educational facilities.
• Expanded definition of private activity for which tax-exempt bonds may be issued, to include bonds for qualified public educational facilities.
Refunds Disregarded in the Administration of Federal Programs and Federally Assisted Programs: The Act extends permanently the rule disregarding all refundable tax credits, such as the refundable portion of the earned income tax credit and the child tax credit, as income for means tested programs.
This review is not intended to be legal advice and is an incomplete and general summary of the provisions of the American Taxpayer Relief Act of 2012.
The Internal Revenue Service announced today annual inflation adjustments for tax year 2013, including the tax rate schedules, and other tax changes from the recently passed American Taxpayer Relief Act of 2012.
The tax items for 2013 of greatest interest to most taxpayers include the following changes.
Details on these inflation adjustments and others are contained in Revenue Procedure 2013-15, which will be published in Internal Revenue Bulletin 2013-5 on Jan.28, 2013. Other inflation adjusted items were published in October 2012 in Revenue Procedure 2012-41.