By Gregory S. Sell
The American Taxpayer Relief Act of 2012 (H.R. 8, as amended) (the “Act”) was passed by Congress on January 1, 2013 and was signed into law by President Obama on January 2nd. The Act extends various tax rate cuts (the “Bush Tax Cuts”) that were set to expire this year, which would have increased taxes for all taxpayers. The Bush Tax Cuts were 2001 and 2003 tax rate cuts on capital gains, ordinary income and qualified dividends, which were originally scheduled to sunset in 2010 but were extended through the end of 2012.
The Act includes marginal income and capital gain tax rate increases, relative to 2012 levels, for taxpayers with income above the following income levels (collectively, the “Threshold”): $400,000 (single filing status) and $450,000 (married couples filing jointly). The Threshold is determined based on adjusted gross income (“AGI”) instead of taxable income. For taxpayers with AGI at or above the Threshold, the maximum income tax rate increased to 39.6% (up from the 2012 rate of 35%) and the capital gains rate was permanently increased to 20% (up from the 2012 rate of 15%). Tax rates for taxpayers with AGI below the Threshold remained at their 2012 levels.
Highlights of the Act’s other key tax changes affecting individuals include:
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- Reinstatement of phase-out of personal exemptions and itemized deductions and credits for taxpayers with incomes above the following AGI levels: $250,000 (single filing status) and $300,000 (married couples filing jointly).
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- Increase in estate tax rate to 40% of the value above the estate tax exemption of $5,000,000, as adjusted for inflation (up from the 2012 rate of 35%). The estate tax exemption of $5,000,000 was made permanent. The estate tax exemption amount was scheduled to reduce to $1,000,000 and the rate was scheduled to increase to 55% in 2013.
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- Increase in gift tax rate to 40% of the value above the gift tax exemption of $5,000,000, as adjusted for inflation (up from the 2012 rate of 35%). The gift tax exemption of $5,000,000 was made permanent. The gift tax exemption amount was scheduled to reduce to $1,000,000 and the rate was scheduled to increase to 55% (plus an additional 5% for certain large gifts) in 2013. The gift and estate tax systems remain unified for gifts made during lifetime or at death, meaning the exemption may be used during lifetime to make tax-free gifts or at death to shield bequests from the estate tax.
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- A patch for the alternative minimum tax (“AMT”) for 2012, with additional changes to permanently index the AMT exemption and other AMT amounts to inflation to avoid future annual patches. For 2012, the AMT exemption amounts increased to $50,600 (single filing status) and $78,750 (married couples filing jointly).
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- Increase in employee Social Security withholding tax to 6.2% (up from 2012 level of 4.2%) for both employers and their employees. The two-year old 2% cut expired at the end of 2012, with reversion back to the prior rate.
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- Extension through 2013 of tax-free distributions for charitable purposes from IRA accounts of individuals aged 70½ or older (subject to annual cap of $100,000 per taxpayer). This provision initially expired in 2011, but was resurrected for the 2013 tax year. Additional transitional rules apply for certain charitable IRA distributions, which require certain actions to be taken by January 31, 2013.
- Extension of certain tax credits and deductions for individuals, including the education tax credit, child tax credit and dependent care credit, relief from cancellation of debt income for principal residences, deduction for mortgage insurance premiums as interest and deduction for state and local general sales taxes.
Highlights of the Act’s other key tax changes affecting businesses include:
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- Extension of certain business tax provisions, including the new markets tax credit, the work opportunity credit and empowerment zone incentives. These provisions originally expired in 2011, but were resurrected for the 2013 tax year.
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- Extension of the research and development tax credit, which was extended for tax years 2012 and 2013. This credit originally expired in 2011.
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- Extension through 2013 of the 50% bonus depreciation.
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- Extension of the IRC Section 179 asset expensing election, which was extended for tax years 2012 and 2013. The expensing amount was increased to $500,000 of qualifying additions, subject to an aggregate cap on additions of $2,000,000 for both 2012 and 2013.
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- Extension of the IRC Section 1202 small business stock exclusion at 100%. This exclusion originally expired in 2011, but was extended through December 31, 2013, subject to satisfaction of the requirements of IRC Section 1202.
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- Reversion to a 5-year period for imposing the built-in gains tax for subchapter S corporations for tax years 2012 and 2013, from a 10-year period. This rule initially expired in 2011.
- Extension through 2013 of certain energy tax incentives that originally expired in 2011.
We will continue to monitor as more details are released and provide summaries to you.
For more information, please contact your Davis & Kuelthau attorney or Gregory Sell at gsell@dkattorneys.com, (414) 225-1405.