The American Taxpayer Relief Act
Shortly after going over the “fiscal cliff,” Congress on January 1, 2013 passed the American Taxpayer Relief Act, H.R.8. The Act preserves most of the George W. Bush-era tax cuts and extends many other lapsed tax provisions, but increases income taxes for certain high-income taxpayers. Some highlights of the Act are as follows:
1. Payroll Tax Holiday Expires
While the Act preserved or extended many tax provisions, it did not extend the 4.2% rate for employees’ portion of the Social Security payroll tax, which has now reverted to 6.2%. Expect more payroll taxes being taken from our paychecks this year.
2. Individual Income Tax Rates
All of the individual income tax rates remain the same, except there is a new top rate of 39.6% on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).
3. Phaseout of Itemized Deductions and Personal Exemptions
The personal exemptions and itemized deductions phaseout is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.
4. Medical Expenses Itemized Deduction Threshold
The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.
5. Capital Gains and Dividends
Taxpayers earning more than $400,000 ($450,000 for joint filers) will now pay a 20% tax on capital gains and dividends, while those earning less continue to enjoy the 15% rate. Lower income earners in the 10% and 15% tax brackets will enjoy a favorable 0% rate. With the new 3.8% Medicare surtax, the maximum rate will effectively be 23.8% for many higher-income payers.
6. Alternative Minimum Tax
The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Relief from AMT for nonrefundable credits is retained.
7. Estate and Gift Tax
The Act retains the $5 million estate and gift tax exemption, which will be indexed for inflation. The maximum transfer tax rate was increased from 35% to 40%. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the Act. Overall, this is great news compared to the dramatic reduction in the exemption amount that would have taken place under prior law.
8. Various Permanent and Temporary Extensions
The Act permanently extends some provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (EGTRRA), and Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (JGTRRA). Other tax provisions received temporary extensions. Among these are the following:
A. Permanent Extensions
i. Marriage penalty relief (i.e., the increased size of the 15% rate bracket (IRC § 1(f)(8)) and increased standard deduction for married taxpayers filing jointly (IRC § 63(c)(2)).
ii. The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one) (IRC § 21).
iii. The enhanced rules for student loan deductions introduced by EGTRRA (IRC § 221).
iv. Special rates for accumulated earnings tax and personal holding company tax (IRC §§ 531 and 541).
B. Temporary Extensions
i. The American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2018. Other credits and items from the American Recovery and Reinvestment Act of 2009, P.L. 111-5, that were extended for the same five-year period include enhanced provisions of the child tax credit under IRC § 24(d) and the earned income tax credit under IRC § 32(b).
ii. The following are some of the individual items were extended through 2013:
· Deduction for certain expenses of elementary and secondary school teachers (IRC § 62);
· Exclusion from gross income of discharge of qualified principal residence indebtedness (IRC § 108);
· Parity for exclusion from income for employer-provided mass transit and parking benefits (IRC § 132(f));
· Mortgage insurance premiums treated as qualified residence interest (IRC § 163(h));
· Deduction of state and local general sales taxes (IRC § 164(b)); and
· Above-the-line deduction for qualified tuition and related expenses (IRC § 222).
iii. The following are some of the business items that were extended through 2013:
· IRC § 41 credit for increasing research and development activities. The credit is modified to allow partial inclusion in qualified research expenses and gross receipts those of an acquired trade or business or major portion of one;
· Increased expensing amounts under IRC § 179;
· Additional 50% first-year bonus depreciation (IRC § 168(k)); and
· Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (IRC § 168(e)).