SUMMARY OF TAX PROVISIONS IN The American Taxpayer Relief Act of 2012
On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 (the “Act”). Below is a very brief description of some of the salient provisions of the Act that will impact our clients. A more detailed and comprehensive description of the Act will be available once our office makes a full review of the statute’s provisions.
“EGTRRA” means the Economic Growth and Tax Relief Reconciliation Act of 2001
“TRUIRJCA” means the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010
“PPACA” means the Patient Protection and Affordable Care Act of 2010
I. Income Tax Matters
Reductions in Individual Income Tax Rates For Most Taxpayers
The Act makes permanent1the 10%, 15%, 25%, 28%, 33% and 35% marginal rates on income at or below $400,000 (individual filers), $425,000 (heads of households) and $450,000 (married filing jointly) for taxable years beginning after December 31, 2012.
The Act increases the rates for taxpayers earning above the $400,000, $425,000 and $450,000 income threshold, respectively, from 35% to 39.6%.
The Act repeals the personal exemption phase-outs on income at or below $250,000 (individual filers), $275,000 (heads of households) and $300,000 (married filing jointly) for taxable years beginning after December 31, 2012.
Estimated Tax Rates for 20132
|If taxable income is:||The tax will be:|
|Not over $8,925||10% of taxable income|
|Over $8,925 but not over $36,250||$892.50 plus 15% of the excess over $8,925|
|Over $36,250 but not over $87,850||$4,991.25 plus 25% of the excess over $36,250|
|Over $87,850 but not over $183,250||$17,891.25 plus 28% of the excess over $87,850|
|Over $183,250 to $398,350||$44,603.25 plus 33% of the excess over $183,250|
|Over $398,350 to $400,000||$115,586.25 plus 35% of the excess over $398,350|
|Over $400,000||$116,163.75 plus 39.6% of the excess over $400,000|
Married Couples, Filling Jointly
|If taxable income is:||The tax will be:|
|Not over $17,850||10% of taxable income|
|Over $17,850 but not over $72,500||$1,785 plus 15% of the excess over $17,850|
|Over $72,500 but not over $146,400||$9,982.50 plus 25% of the excess over $72,500|
|Over $146,400 but not over $223,050||$28,457.50 plus 28% of the excess over $146,400|
|Over $223,050 to $398,350||$49,919.50 plus 33% of the excess over $223,050|
|Over $398,350 to $450,000||$107,768.50 plus 35% of the excess over $398,350|
|Over $450,000||$125,846 plus 39.6% of the excess over $450,000|
The Act does not affect the PPACA which adds an additional 0.9% Medicare surtax on wages received in connection with employment (including those self-employed) for taxpayers earning above $200,000 (single filers) or $250,000 (married, filing jointly). Therefore, these higher income earning will see their Medicare contributions increase from 1.45% to 2.35%. in 2013.
Capital Gains and Dividends
Under the Act, the long-term capital gains and dividend rates for taxpayers in the 10% and 15% brackets is equal to 0%. For those taxpayers in the 25%, 28% and 35% brackets, the long-term capital gains and dividend rates is equal to 15%. For those taxpayers in the highest bracket, 39.6%, the long-term capital gains and dividend rates is equal to 20%. Short-term capital gains will continue to be taxed at the individual income tax rate.
Please keep in mind that the Act does not affect the provisions of the PPACA scheduled to become effective on January 1, 2013, which requires taxpayers earning $200,000 (individual filers) and $250,000 (married, filing jointly) to also pay an additional 3.8% on Net Investment Income (such as capital gains and other income from passive investments). Therefore, the effective top rate for many higher-income taxpayers becomes 23.8% for long-term capital gains and 43.4% for short-term capital gains starting in 2013.
Alternative Minimum Tax (AMT)
The Act permanently patches the AMT, increasing the 2012 exemption amounts to $50,600 (individual filers) and $78,750 (married, filing jointly). Going forward, these amounts will be indexed for inflation.
Personal Exemption Phase-Out (PEP) and Pease Limitations
The Act increases the threshold whereby a taxpayer would be subject to the PEP to $300,000 (married, filing jointly) $275,000 (head of households) and $250,000 (single filers). Further, the Pease limitations on itemized deductions (which was eliminated by EGTRRA) are reinstated at the same threshold levels as the PEP.
The new Act raises taxes for all wage earners (including those self-employed) by failing to renew the 2012 payroll tax holiday. Therefore all wage earners will be contributing 6.2% (instead of 4.2%) of their earned income towards Social Security.
II. Permanent Federal Estate, Gift and Generation-Skipping Transfer (GST) Tax Relief
Exemption from Federal Estate, Gift and GST
The EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35% and increased the gift tax exemption to $1 million for 2010. In 2010, the TRUIRJCA set the exemption at $5 million per person with a top tax rate of 35% for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount was indexed beginning in 2012.
The Act permanently provides for a $5 million estate tax exemption and indexes that amount for inflation going forward. The Act also sets the top tax rate to 40% for estates of decedents dying after December 31, 2012.3 The Act also permanently provides for a $5 million gift tax exemption (inflation adjusted) with a 40% tax rate, effective after December 31, 2012. As with the TRUIRJCA, the Act unifies the estate and gift tax exemption, thereby creating a single graduated rate schedule for both taxes. That single lifetime exemption could be used for gifts and/or bequests.
Finally, the Act permanently sets the GST tax exemption to $5,000,000 (inflation adjusted) with a 40% tax rate, effective after December 31, 2012. In addition, the Act extends a number of other GST related provisions which were set to expire, including the deemed allocation and retroactive allocation rules.
The TRUIRJCA allowed the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse for estates of decedents dying after December 31, 2010, and before December 31 2012. The Act makes permanent this provision and is effective for estates for decedents dying after December 31, 2012.
III. Individual and Business Extenders
The Act extends a huge amount of individual and business provisions through at least the end of 2013, including unemployment benefits, the Doc Fix (i.e. physician payment update), 50% “bonus” depreciation, research and work tax credits, the $1,000 child tax credit, the $2,500 tax credit for college tuitions, and treatment of mortgage insurance premiums. Act
1 Although the TRUIRJCA makes these marginal rates “permanent”, Congress could reconsider the entire tax structure in the future as part of an overall reform of the tax code or in the upcoming debt ceiling negotiations scheduled to get underway shortly.
2 Per CCH projections. The IRS is expected to release official 2013 tax rate tables now that the Act has been finalized.
3 The IRS released a limited set of inflation adjustments for 2013 last October, but did not include key items such as the estate, gift and GST exemptions The IRS may make further inflationary adjustments for 2013, so it is yet unclear whether the estate, gift and GST exemptions amounts will be further adjusted for inflation.