Highlights of the American Taxpayer Relief Act of 2012
January 3, 2013
Dear clients and friends,
I hope you had a wonderful holiday season with your family and friends and that this new year brings you joy and prosperity. As you probably know, the Congress recently passed, and the President signed into law, new income tax legislation formally known as the American Taxpayer Relief Act of 2012. This legislation was passed in order to avert the “fiscal cliff” and I wanted to highlight 10 things that may affect your income tax situation. If you also couple the new tax law changes as part of this bill with the new tax law changes of the Affordable Care Act (Obamacare), this new year will most likely be seen with additional tax liability on your part.
1. Individual Income Tax Rates. Retained at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6% as would have occurred under the EGTRRA sunset). A 39.6% rate applies to income above a certain threshold. The applicable threshold is $450,000 for joint filers and surviving spouses, $425,000 for heads of household, $400,000 for single filers and $225,000 for married taxpayers filing separately. These dollar amounts are inflation-adjusted for tax years after 2013.
COMMENT: It appears that there is a marriage penalty here. Two single people living together would get two $400,000 exemptions (one each). A married couple gets hit when combined income exceeds $450,000.
2. Personal Exemption Phaseout. Personal exemptions begin to phase out for those making $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. The total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer's AGI exceeds the applicable threshold. This is inflation-adjusted for tax years after 2013.
COMMENTS: It appears that there is another big marriage penalty here. This phaseout, along with the itemized deduction phase-out, will increase the income taxes of persons who make well below the $450,000/$400,000 amounts that are being touted in the media.
3. Itemized Deduction Phaseout. Itemized deductions are reduced by 3% of the amount by which the taxpayer's adjusted gross income (AGI) exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. The starting thresholds are $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. Inflation adjustments apply after 2013.
COMMENTS: Same comments as number 2 above.
4. Capital Gain and Dividend Rates. The top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will permanently be subject to a 0% rate. Taxpayers who are subject to a 25%-or-greater rate on ordinary income, but whose income levels fall below the $400,000/$450,000 thresholds, will continue to be subject to a 15% rate on capital gains and dividends.
COMMENTS: Don’t forget that the new 3.8% “Obamacare” taxes will also now apply to these items. If your AGI is over $450,000 as married filing jointly or $400,000 as single, your effective capital gain and dividend rate may be 23.8%. If your AGI is over $250,000 as married filing jointly or $200,000 as single, your effective capital gain and dividend rate may be 18.8%.
5. Estate and Gift Tax Rates. The maximum rates are increased to 40%.
COMMENT: At least this is better than the 55% rate that was scheduled to apply.
6. Unified Credit for Transfer Taxes/GST Exemption. Retained at $5 million, as adjusted for inflation. Portability of unused credit between spouses has also been retained.
COMMENT: This is a positive piece of this legislation and I suggest you still use appropriate gifting to reduce your taxable estate (if applicable).
7. AMT Relief. Relief has been made permanent by a permanent increase in exemption amounts, and the index of those amounts with inflation. This should minimize the increase of more and more taxpayers into the AMT.
COMMENT: This permanent increase is also positive news, but getting rid of the AMT or higher exemption amounts would have been even better.
8. Payroll Tax Cut Allowed to Expire. While technically not part of the new law, Congress has let the temporary reduction in payroll taxes expire. Effective January 1, 2013, the employee portion of Social Security tax on wages will increase to 6.2% (up from 4.2% in 2011 and 2012).
COMMENT: Wage earners in all tax brackets will feel the pain of this expiration in their take-home pay starting now.
9. Child Tax Credit, Earned Income Credits and Education Credits. The increased child tax credits and earned income credits and the expanded education credits have been extended for five years.
COMMENT: This extension is great news for people who are able to actually take full advantage of these credits. The income phase-outs on these credits are still in full effect and may limit how much they apply to your income tax situation.
10. Bonus Depreciation and Section 179. 50% bonus depreciation is back for 2013 and the section 179 limit has been increased to $500,000 ($2M purchase limit).
COMMENT: This piece of the legislation is good for businesses that want to accelerate depreciation of new assets that have been purchased. As usual, I still recommend you use common sense and not buy a vehicle or piece of equipment just for a tax write-off. I hope most of you really question that friend or relative that buys new vehicles or equipment every year because “my CPA said I need to spend money”.
Obviously, I have not covered every possible way that the new legislation may affect your specific tax situation but hopefully I educated you a small bit. I am attaching the following links in case you want to learn more about this new legislation, or if you want to learn more about staying connected to me through social media outlets. As always, if you would like to discuss your specific tax or accounting situation, call me directly at 281-578-2002 or email me at firstname.lastname@example.org. I hope 2013 is off to a great start for you and I wish you all the best.
Marcus Dillon, CPA
For more about the American Taxpayer Relief Act of 2012: http://tax.cchgroup.com/downloads/files/pdfs/legislation/ATPR.pdf
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