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 extended tax breaks for individual and businesses. Here’s a look at the key elements of the package:
INDIVIDUAL TAX RATES
- Tax rates.For tax years beginning after 2012, the 10%,15%,25%,28%,33% and 35% taxbrackets from the Bush tax cuts will remain in place and are madepermanent. This means that, for most Americans, the tax rates will staythe same. However, there will be a new 39.6% rate, which will begin attaxable income of $400,000 (single) and $450,000 (joint filers).
- Capital gainsand qualified dividends rates. The new law retains the 0% tax rate onlong-term capital gains and qualified dividends, modifies the 15% rate,and establishes a new 20% rate. Beginning in 2013, the rate will be 0% ifincome falls below the 25% tax bracket; 15% if income falls at or abovethe 25% tax bracket but below the new 39.6% rate; and 20% if income fallsIn the 39.6% tax bracket. It should be noted that the 20% top rate doesnot include the new 3.8% surtax on investment-type income and gains fortax years beginning after 2012, which applies on investment income above$200,000 (single) and $250,000 (joint filers) in adjusted gross income. Soactually, the top rate for capital gains and dividends beginning in 2013will be 23.8% if income falls in the 39.6% tax bracket. For lower incomelevels, the tax will be 0%,15%, or 18.8%.
OTHER INDIVIDUAL CHANGES
- Personalexemption phaseout. Beginning in 2013, personal exemptions will bephased out (i.e., reduced) for adjusted gross income over $250,000(single) and $300,000 (joint filers). Taxpayers claim exemptions forthemselves, their spouses and their dependents. Last year, each exemptionwas worth $3,800.
- Itemized deductionlimitation. Beginning in 2013, itemized deductions will be limited foradjusted gross income over $250,000 (single) and $300,000 (joint filers).
- AMT relief.The new law provides permanent alternative minimum tax (AMT) relief. Priorto the Act, the individual AMT exemption amounts for 2012 were to havebeen $33,750 for unmarried taxpayers and $45,000 for joint filers.Retroactively effective for tax years beginning after 2011, the new lawpermanently increases these exemption amounts to $50,600 for unmarriedtaxpayers and $78,750 for joint filers. Without these changes thealternative minimum tax would have applied to many middle income taxpayersin 2012.
- Tax creditsfor low to middle wage earners. The new law extends for five years thefollowing items that were originally enacted as part of the 2009 stimuluspackage and were slated to expire at the end of 2012: (1) the AmericanOpportunity tax credit, which provides up to $2,500 in refundable taxcredits for undergraduate college education; and (2) eased rules forqualifying for the refundable child credit.
- Tax breakextenders. Many of the “traditional” tax extenders are extended fortwo years, retroactively to 2012 and through the end of 2013. Among manyothers, the extended provisions include the election to take an itemizeddeduction for state and local general sales taxes in lieu of the itemizeddeduction for state and local income taxes, the $250 above-the-linededuction for certain expenses of elementary and secondary schoolteachers, and the research credit.
- Energy taxcredits. The nonbusiness energy property credit for energy-efficientexisting homes is retroactively extended for two years through 2013. Ataxpayer can claim a 10% credit on the cost of: (1) qualified energyefficiency improvements, and (2) residential energy property expenditures,with a lifetime credit limit of $500.
PAYROLL TAX INCREASE
- Payroll taxcut is no more. The 2% payroll tax cut effective for 2011 and 2012 wasallowed to expire at the end of 2012. This means that all individuals withearned income will see a tax increase even though the Tax Act wasadvertised as no tax increase for 98% of Americans.
ESTATE TAX CHANGES
- Estate tax.The new law prevents steep increases in estate, gift andgeneration-skipping transfer (GST) tax that were slated to occur forindividuals dying and gifts made after 2012 by permanently keeping theexemption level at $5,000,000 (as indexed for inflation). However, the newlaw also permanently increases the top estate, gift, and GST rate from 35%to 40% It also continues the portability feature that allows the estate ofthe first spouse to die to transfer his or her unused exclusion to thesurviving spouse. All changes are effective for individuals dying andgifts made after 2012.
- Cost recovery.The new law extends increased expensing limitations and treatment ofcertain real property as Code Section 179 property. It also extends andmodifies the bonus depreciation provisions with respect to property placedin service after Dec. 31,2012, in tax years ending after that date.
Extension of additional first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, by permitting an additional fist-year write-off of the cost. For qualified property acquired and placed in service after Dec. 31, 2011 and before Jan. 1, 2013, the additional first-year depreciation was 50% of the cost. The new law extends this additional first-year depreciation for investments placed in service before Jan. 1, 2014