The new-year began with some
political drama, as last-minute negotiations attempted to avert sending the
nation over the "fiscal cliff." Technically, we actually did go over
the cliff, however briefly, as a host of tax provisions and automatic spending
cuts took effect at the stroke of midnight on December 31, 2012. However,
January 1, 2013, saw legislation--retroactively effective--pass the U.S.
Senate, and then later the House of Representatives. The American Taxpayer
Relief Act of 2012 (ATRA) permanently extends a number of major tax provisions
and temporarily extends many others. Here are the basics.
Tax rates
For most individuals, the
legislation permanently extends the lower federal income tax rates that have
existed for the last decade. That means most taxpayers will continue to pay tax
according to the same six tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) that
applied for 2012. The top federal income tax rate, however, will increase to
39.6% beginning in 2013 for individuals with income that exceeds $400,000
($450,000 for married couples filing joint returns).
Generally, lower tax rates
that applied to long-term capital gain and qualifying dividends have been
permanently extended for most individuals as well. If you're in the 10% or 15%
marginal income tax bracket, a special 0% rate generally applies. If you are in
the 25%, 28%, 33%, or 35% tax brackets, a 15% maximum rate will generally
apply. Beginning in 2013, however, those who pay tax at the higher 39.6%
federal income tax rate (i.e., individuals with income that exceeds $400,000,
or married couples filing jointly with income that exceeds $450,000) will be
subject to a maximum rate of 20% for long-term capital gain and qualifying
dividends.
Alternative minimum tax
(AMT)
The AMT is essentially a
parallel federal income tax system with its own rates and rules. The last
temporary AMT "patch" expired at the end of 2011, threatening to
dramatically increase the number of individuals subject to the AMT for 2012.
The American Taxpayer Relief Act permanently extends AMT relief, retroactively
increasing the AMT exemption amounts for 2012, and providing that the exemption
amounts will be indexed for inflation in future years. The Act also permanently
extends provisions that allowed nonrefundable personal income tax credits to be
used to offset AMT liability.
2012 AMT Exemption Amounts
Before Act After Act
Married filing jointly $45,000 $78,750
Unmarried individuals $33,750 $50,600
Married filing separately $22,500 $39,375
Estate tax
The Act makes permanent the
$5 million exemption amounts (indexed for inflation) for the estate tax, the
gift tax, and the generation-skipping transfer tax--the same exemptions that
were in effect for 2011 and 2012. The top tax rate, however, is increased to
40% (up from 35%) beginning in 2013.
The Act also permanently
extends the "portability" provision in effect for 2011 and 2012 that
allows the executor of a deceased individual's estate to transfer any unused
exemption amount to the individual's surviving spouse.
Phaseout or limitation of
itemized deductions and personal exemptions
In the past, itemized
deductions and personal and dependency exemptions were phased out or limited
for high-income individuals. Since 2010, neither itemized deductions nor
personal and dependency exemptions have been subject to phaseout or limitation
based on income, but those provisions expired at the end of 2012.
The new legislation provides
that, beginning in 2013, personal and dependency exemptions will be phased out
for those with incomes exceeding specified income thresholds. Similarly,
itemized deductions will be limited. For both the personal and dependency
exemptions phaseout and the itemized deduction limitation, the threshold is
$250,000 for single individuals ($300,000 for married individuals filing joint
federal income tax returns).
Other expiring or expired
provisions made permanent
- "Marriage penalty" relief in the form of an increased
standard deduction amount for married couples and expanded 15% federal
income tax bracket
- Expanded tax credit provisions relating to the dependent care tax
credit, the adoption tax credit, and the child tax credit
- Higher limits and more generous rules of application relating to
certain education provisions, including Coverdell education savings
accounts, employer-provided education assistance, and the student loan
interest deduction
Temporary extensions
- Provisions relating to increased earned income tax credit amounts for families with three or more children are extended through 2017
- American Opportunity credit provisions relating to maximum credit
amount, refundability, and phaseout limits are extended through 2017
- The $250 above-the-line tax deduction for educator classroom
expenses, the limited ability to deduct mortgage insurance premiums as
qualified residence interest, the ability to deduct state and local sales
tax in lieu of the itemized deduction for state and local income tax, and
the deduction for qualified higher education expenses are all extended
through 2013
- Charitable IRA distributions (IRA holders over age 70½ are able to
exclude from income up to $100,000 in qualified distributions made to
charitable organizations) are extended through 2013; special rules apply
for the 2012 tax year
- Exclusion of qualified mortgage debt forgiveness from income
provisions extended through 2013
- Exclusion of 100% of the capital gain from the sale of qualified small business stock extended to apply to stock acquired before January 1, 2014
- 50% bonus depreciation and expanded Section 179 expense limits
extended through 2013
Source: Broadridge Investor Communication Solutions, Inc, January 2, 2013
The opinions voiced in this material are for general information only and
are not intended to provide specific advice or recommendations for any
individual. This information is not intended to be a substitute for specific
individualized tax advice. We suggest that you discuss your specific tax issues
with a qualified tax advisor.
Securities and Advisory services offered through LPL Financial, Member
FINRA/SIPC.
