This summary of tax provisions included in the American Taxpayer Relief Act of 2012 (“New Tax Act”) is based in part on information from Spidell Publishing, Inc.
Tax rates beginning January 1, 2013
A top rate of 39.6% (up from 35%) will be imposed on individuals making more than $400,000 a year, $425,000 for head of household, and $450,000 for married filing joint. Reduced 2001 income tax rates, in effect since 2001, are made permanent for individuals earning less than these amounts. Effective 1/1/2013, some taxpayers will also pay an additional 3.8% tax on unearned net investment income in excess of certain threshold amounts ($200,000 for single filers, $250,000 for joint filers, and $125,000 for married taxpayers filing separately) as part of a separate tax enacted in 2010 to pay for the Affordable Care Act.
2% Social Security reduction is gone
Payroll taxes will increase in 2013 to 6.2% on the first $113,700 of wages because the New Tax Act did not extend the temporary 4.2% rate that had been in effect for two years.
Alternative Minimum Tax – permanent relief
The Alternative Minimum Tax exemption amount for 2012, which absent legislation would have reverted to pre-2001 levels, has been retroactively adjusted to $50,600 for unmarried taxpayers and $78,750 for married persons filing jointly. After 2012, these exemption amounts will increase by an inflation adjustment.
Dividends and capital gains
The maximum capital gains tax will rise from 15% to 20% for individuals taxed at the 39.6% rates (those making $400,000, $425,000, or $450,000 depending on filing status, as noted above). Because of the 3.8% net investment income tax mentioned above, the effective top tax rate for many higher-income taxpayers becomes 23.8% for long-term capital gains and 43.4% for short-term capital gains. A zero percent rate will continue to apply to capital gains and dividends to the extent income falls below the top of the 15% income tax bracket – projected for 2013 to be $72,500 for joint filers and $36,250 for single persons. Qualified dividends for all taxpayers will continue to be taxed at capital gains rate, rather than ordinary income tax rates.
Itemized deduction and personal exemption phase-outs
The itemized deduction phase-out is reinstated. The reduction is 3% of the amount by which AGI exceeds certain AGI thresholds, with a maximum reduction of 80%. Certain deductions are excluded from the phase-out, such as medical expenses, investment interest expense, and casualty, theft, and wagering losses. The personal exemption phase-out will also be reinstated. Both phase-outs begin at AGI levels of $250,000 for single taxpayers and $300,000 for married taxpayers filing jointly.
The estate tax regime will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples) but will be applied at a higher 40% rate (up from 35% in 2012). The inflation-adjusted exemption for 2012 is $5,120,000. The New Tax Act also provides for a permanent spousal portability provision which allows spouses to transfer their unused estate tax exemption to the surviving spouse.
Personal tax credits
The $1,000 Child Tax Credit, the enhanced Earned Income Tax Credit, and the enhanced American Opportunity Tax Credit will all be extended through 2017. The dependent care credit, which allows certain taxpayers to deduct up to 35% of expenses to a maximum of $6,000 for two children, is permanently extended.
Other personal deductions and exclusions
The following personal deductions and exclusions are extended through 2013:
- Exclusion of income from discharge of indebtedness on a qualified principal residence;
- $250 above-the-line teacher deduction;
- Mortgage insurance premiums treated as residence interest;
- Deduction for state and local taxes;
- Above-the-line deduction for tuition; and
- IRA-to-charity exclusion (plus special provisions allowing transfers made in January 2013 to be treated as made in 2012).
The following business deductions and exclusions are extended through 2013:
- The Research Credit and the production tax credits, among others, will be extended through 2013;
- 15-year depreciation and §179 expensing allowed on qualified real property through 2013;
- Work Opportunity Credit extended through 2013;
- 50% bonus depreciation extended through 2013; and
- The §179 deduction limitation is $500,000 for 2012 and 2013.
Please contact Martini, Iosue & Akpovi by phone at (818) 789-1179 if you have questions or want more information on this tax-saving opportunity.