Authored by: William Gerhardt, J.D., LL.M., Taxation
Although the United States fiscal cliff was averted, the American Taxpayer Relief Act of 2012 (the “Act”), which was passed by Congress on January 1, 2013 and signed into law by President Barack Obama the next day, still brings with it a number of challenges for U.S. tax payers. In an effort to help our readership understand key changes that may directly affect them, we have compiled the following summary of provisions concerning income taxes.
- The maximum income tax rate increases to 39.6% (up from 35%) for individuals making more than $400,000 a year ($450,000 for joint filers; $425,000 for heads of household). These amounts will be indexed for inflation.
- Dividends and capital gains are taxed at 20% (up from 15%) for individuals making at least $400,000 ($450,000 for joint returns). When accounting for new 3.8% surtax on net investment income and gains beginning in 2013, the effective tax rate on higher-income taxpayers will be 23.8%.
- The two-percentage-point reduction in payroll taxes for Old Age, Survivors and Disability Insurance (“OASDI”) tax, commonly known as the Social Security tax, will be allowed to expire.
- It patches the alternative minimum tax (“AMT”) for 2012 and indexes the exemption amounts for inflation going forward.
- Reinstated is the Personal Exemption Phaseout (“PEP”) of personal exemptions and overall limitation on itemized deductions for married couples filing jointly earning over $300,000; $275,000 for heads of household; and single taxpayers earning over $250,000. Under the phaseout, 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 adjusted gross income (“AGI”) exceeds the applicable threshold.
- The “Pease” limitation on itemized deductions, which had previously been suspended, is reinstated with a phaseout threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Thus, for taxpayers subject to the “Pease” limitation, the total amount of their itemized deductions is reduced by 3% of the amount by which the taxpayers’ AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions.
- The 50% bonus depreciation is extended through 2013.
- Tax credits for businesses, including the research credit, the new markets tax credit, railroad track maintenance credit, mine rescue team training credit, work opportunity credit, the Section 179 asset expensing at $500,000, stock exclusion at 100%, empowerment zone incentives, and the domestic production activities deduction are generally extended through the end of 2013.
- The reduction in S corporation recognition period for built-in gains tax is extended through 2013, with a 5-year period instead of a 10-year period.
- A number of individual tax provisions have been retroactively extended through 2013: above the line deduction for teacher expenses, relief from cancellation of debt income for principal residences, parity for employer-provided mass transit benefits, deduction for mortgage insurance premiums as interest, election to deduct state and local sales taxes in lieu of income taxes, special rule for contributions of capital gain real property made for conservation purposes, above the line deduction for qualified education expenses, and tax-free distributions from IRA accounts for charitable purposes.
- There is a five-year extension of credits that was enhanced as part of the stimulus, including the college tuition credit, the earned income tax credit, and the child tax credit.
- Various energy credits are also extended, including non-business energy property credit, alternative fuel vehicle refueling property credit, credits with respect to facilities producing energy from certain renewable resources, and credits for energy efficient homes and appliances.
Having a full understanding of the direct impact these changes may have on you personally is the first-step to being prepared. To discuss your individual tax matter or gain greater detail on the information found within, we encourage you to contact your local PS&Co. tax professional…we are here to help.
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