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2012 American Taxpayer Relief Act

The recently enacted 2012 American Taxpayer Relief Act is a sweeping tax package that includes, among many other items, permanent extension of the Bush-era tax cuts for most taxpayers. Here’s a look at the key elements of the package:

  • Taxrates. For tax years beginning after 2012,the 10%, 15%, 25%, 28%, 33 and 35% tax brackets from the Bush tax cuts will remain in place and are made permanent. 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) tax that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation). However, the new law also permanently increases the top estate, gift, and GST rate from 35% to 40%. It also continues the portability feature 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 for individuals dying and gifts made after 2012.
  • Capital gains and qualified dividends rates. Beginning in2 013,the rate for long-term capital gains and qualified dividends will be 0% if income falls below the 25% tax bracket; 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate; and 20% if 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 to investment income for filers with adjusted gross income above $200,000 (single) and $250,000 (joint filers). So actually, the top rate for capital gains and dividends beginning in 2013 will be 23.8% if income falls in the 39.6% tax bracket. For lower income levels, the tax will be 0%, 15%, or 18.8%.
  • Personal exemption phase out. Beginning in 2013, personal exemptions will be phased out for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers).
  • Itemized deduction limitation. Beginning in 2013,itemized deductions will delimited for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers).
  • AMT relief. The new law provides permanent alternative minimum tax (AMT)relief. Retroactively effective for tax years beginning after 2011, the new law permanently increases the AMT 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, it indexes these exemption amounts for inflation.
  • Tax credits for low to middle wage earners. The new law extends for five years the following items that 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 (EITC) changes.
  • 179 expensing. The new law provides that for tax years beginning in 2012 or 2013, a small business taxpayer will be allowed to write off up to $500,000 of capital expenditures subject to a phaseout once capital expenditures exceed $2,000,000. For tax years beginning after 2013, the maximum expensing amount will drop to $25,000 and the phaseout level will drop to $200,000.
  • Extension of additional first-year depreciation. The new law extends the 50% additional first- year depreciation for investments placed in service before Jan. 1, 2014 (before Jan. 1, 2015 for certain longer-lived and transportation property).
  • Pension provision. For transfers after Dec. 31, 2012, in tax years ending after that date,a plan provision in an applicable retirement plan (which includes a qualified Roth contribution program) can allow participants to elect to transfer amounts to designated Roth accounts with the transfer being treated as a taxable qualified rollover contribution.
  • Individual Tax break extenders. The following items were extended for tax years 2012 and 2013:
    • The deduction for certain expenses of elementary and secondary school teachers;
    • The exclusion for discharge of qualified principal residence indebtedness;
    • The treatment of mortgage insurance premiums as qualified residence interest;
    • The option to deduct State and local general sales taxes;
    • The above-the-line deduction for qualified tuition and related expenses;
    • Tax-free distributions from individual retirement plans for charitable purposes. Because 2012 has already passed, a special rule permits distributions taken in 2012 to be transferred to charities for a limited period in 2013. Another special rule permits certain distributions made in 2013 as being deemed made on Dec. 31, 2012.
  • Payroll tax cut is no more. The 2% payroll tax cut was allowed to expire at the end of 2012.

We hope this information is helpful. If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call.