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, revised tax rates on ordinary and capital gain income for high-income individuals, modification of the estate tax, permanent relief from the AMT for individual taxpayers, limits on the deductions and exemptions of high-income individuals, and a host of retroactively resuscitated and extended tax breaks for individual and businesses. Here’s a look at the key elements of the package:
- Tax rates: 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. This means that, for most Americans, 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) 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: 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 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 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 income falls in the 39.6% tax bracket. For lower income levels, the tax will be 0%, 15%, or 18.8%.
- Personal exemption phaseout: Beginning in 2013, personal exemptions will be phased out (i.e., reduced) for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers). Taxpayers claim exemptions for themselves, their spouses and their dependents. Last year, each exemption was worth $3,800.
- Itemized deduction limitation: Beginning in 2013, itemized deductions will be limited 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. Prior to the Act, the 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, 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 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 (EITC) changes.
- Enhanced small business expensing (Section 179 expensing): 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, in 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, and the research credit.
- Pension provision: For transfers after December 31, 2012, in tax years ending after that date, 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.
- Payroll tax cut is no more: The 2% payroll tax cut was allowed to expire at the end of 2012.
If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call.
Business and Individual extenders in the 2012 American Taxpayer Relief Act
In addition to permanently extending the Bush-era tax cuts for most taxpayers, revising tax rates on ordinary and capital gain income for high-income individuals, modifying the estate tax, providing permanent relief from the AMT, and imposing limits on the deductions and exemptions of high-income individuals, the recently enacted 2012 American Taxpayer Relief Act extends a host of important tax breaks for businesses and individuals. Following is an overview of these key tax breaks that were extended by the new law. Please call our office for details of how the new changes may affect you.
Business extenders in the 2012 American Taxpayer Relief Act
Depreciation provisions modified and extended. The following depreciation provisions are retroactively extended by the Act:
… 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements;
… 7-year recovery period for motorsports entertainment complexes;
… accelerated depreciation for business property on an Indian reservation;
… increased expensing limitations and treatment of certain real property as Section 179 property;
… special expensing rules for certain film and television productions; and
… the election to expense mine safety equipment.
The new law also extends and modifies the bonus depreciation provisions with respect to property placed in service after December 31, 2012, in tax years ending after that date.
Business tax breaks extended. The following business credits and special rules are also extended:
… The research credit is modified and retroactively extended for two years through 2013.
… The temporary minimum low-income tax credit rate for nonfederally subsidized new buildings is extended to apply to housing credit dollar amount allocations made before January 1, 2014.
… The housing allowance exclusion for determining area median gross income for qualified residential rental project exempt facility bonds is extended two years.
… The Indian employment tax credit is retroactively extended for two years through 2013.
… The new markets tax credit is retroactively extended for two years through 2013.
… The railroad track maintenance credit is retroactively extended for two years through 2013.
… The mine rescue team training credit is retroactively extended for two years through 2013.
… The employer wage credit for employees who are active duty members of the uniformed services is retroactively extended for two years through 2013.
… The work opportunity tax credit is retroactively extended for two years through 2013.
… Qualified zone academy bonds are retroactively extended for two years through 2013.
… The enhanced charitable deduction for contributions of food inventory is retroactively extended for two years through 2013.
… Allowance of the domestic production activities deduction for activities in Puerto Rico applies for the first eight tax years of the taxpayer beginning after December 31, 2005, and before January 1, 2014.
… Exclusion from a tax-exempt organization’s unrelated business taxable income (UBTI) of interest, rent, royalties, and annuities paid to it from a controlled entity is extended through December 31, 2013.
… Treatment of certain dividends of regulated investment companies (RICs) as “interest-related dividends” is extended through December 31, 2013.
… Inclusion of RICs in the definition of a “qualified investment entity” is extended through December 31, 2013.
… The exception under subpart F for active financing income (i.e., certain income from the active conduct of a banking, financing, insurance or similar business) for tax years of a foreign corporation beginning after December 31, 1998, and before January 1, 2014, for tax years of foreign corporations beginning after December 31, 2005, and before January 1, 2014.
… Look-through treatment for payments between related controlled foreign corporations (CFCs) under the foreign personal holding company rules is extended through January 1, 2014.
… Exclusion of 100% of gain on certain small business stock acquired before January 1, 2014.
… Basis adjustment to stock of S corporations making charitable contributions of property in tax years beginning before December 31, 2013.
… The reduction in S corporation recognition period for built-in gains tax is extended through 2013, with a 10-year period instead of a 5-year period.
… Various empowerment zone tax incentive, including the designation of an empowerment zone and of additional empowerment zones (extended through December 31, 2013) and the period for which the percentage exclusion for qualified small business stock (of a corporation which is a qualified business entity) is 60% (extended through December 31, 2018).
… Tax-exempt financing for New York Liberty Zone is extended for bonds issued before January 1 2014.
… Temporary increase in limit on cover over rum excise taxes to Puerto Rico and the Virgin Islands is extended for spirits brought into the U.S. before January 1, 2014.
… American Samoa economic development credit, as modified, is extended through January 1, 2014.
Individual extenders in the 2012 American Taxpayer Relief Act
The new law extends the following items for the period indicated beyond their prior termination date as shown in the listing:
… the deduction for certain expenses of elementary and secondary school teachers, which expired at the end of 2011 and which is now revived for 2012 and continued through 2013;
… the exclusion for discharge of qualified principal residence indebtedness, which applied for discharges before January 1, 2013 and which is now continued to apply for discharges before January 1, 2014;
… parity for the exclusions for employer-provided mass transit and parking benefits, which applied before 2012 and which is now revived for 2012 and continued through 2013;
… the treatment of mortgage insurance premiums as qualified residence interest, which expired at the end of 2011 and which is now revived for 2012 and continued through 2013;
… the option to deduct State and local general sales taxes, which expired at the end of 2011 and which is now revived for 2012 and continued through 2013;
… the special rule for contributions of capital gain real property made for conservation purposes, which expired at the end of 2011 and which is now revived for 2012 and continued through 2013;
… the above-the-line deduction for qualified tuition and related expenses, which expired at the end of 2011 and which is now revived for 2012 and continued through 2013; and
… tax-free distributions from individual retirement plans for charitable purposes, which expired at the end of 2011 and which is now revived for 2012 and continued through 2013. 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 December 31, 2012.
