American Taxpayer Relief Act of 2012
January 2, 2013
Late last night, the U.S. House of Representatives approved the bill, passed by the U.S. Senate on December 31, 2012, that will become the American Taxpayer Relief Act of 2012 ("ATRA"). President Obama is expected to sign the bill into law today.
The bill addresses various tax increases and delays various required spending decreases associated with the so-called fiscal cliff1. The following is a brief summary of some of the provisions of the American Taxpayer Relief Act of 2012.
Income Tax: The federal income tax rates for individuals with incomes less than $400,000 and joint filers with incomes less than $450,000 will remain as they were under the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), the Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”), and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Tax Relief Act”).
The federal income tax rates, however, for individuals with incomes in excess of $400,000 and joint filers with incomes in excess of than $450,000 will increase from 35% to 39.6%. Further, the tax rate on dividends and long-term capital gains will also increase from 15% to 20% on such taxpayers.
Social Security Payroll Tax: The 2.0% decrease in employees’ portions of the Social Security Payroll Tax expired on January 1, 2013 and was not addressed by the American Taxpayer Relief Act of 2012.
Estate & Gift Tax: The federal estate tax, which was scheduled to apply to estates in excess of $1 million at a rate of 55% beginning in 2013, will be permanently modified so as to apply to estates in excess of $5,000,000 -- indexed for inflation -- at a rate of 40%. The $5,000,000 exemption continues the tax policy created under the Tax Relief Act, however, the 40% rate is an increase from the 35% rate under the Tax Relief Act.
Exemptions & Itemized Deductions: Phase-outs return for exemptions and itemized deductions for individuals with incomes in excess of $250,000 and join filers with incomes in excess of $300,000.
Alternative Minimum Tax: The Alternative Minimum Tax ("AMT") will be permanently indexed for inflation. The AMT is exactly as its name implies, an alternative method of calculating tax, which was created to effectively create a minimum tax for some taxpayers. Prior to the American Taxpayer Relief Act of 2012, the U.S. Congress was required to "parch" the tax every year to reflect changes in inflation.
Section 179 Expensing: The increased Section 179 deduction limits applicable to small businesses will be extended through 2013. Section 179 permits businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during a tax year instead of depreciating such qualifying equipment and/or software over a period of years.
Individual Tax Extenders: Various individual tax cuts will be extended, including deductions for state and local sales taxes, qualified tuition expenses, and mortgage insurance premiums.
Business Tax Extenders: In addition to section 179 expensing, various business tax cuts will be extended, including a one-year extension of 50% bonus depreciation, research credits, and work opportunity credits.
1 The American Taxpayer Relief Act of 2012 extends many of the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 by effectively removing the sunset provision in that acts, which sunset occurred on December 31, 2012.
This brief overview of some important considerations associated with the the American Taxpayer Relief Act of 2012 is by no means comprehensive. Always seek the advice of a competent professional when making important legal decisions.