Summary of the American Taxpayer Relief Act of 2012
The American Taxpayer Relief Act of 2012 (the Act) was signed into law by President Obama on January 2, 2013 and will protect the majority of taxpayers from seeing an increase in their income taxes, thus, averting the “Fiscal Cliff”, for now. However, as part of the negotiations of this “Fiscal Cliff” deal, all working Americans will see a reduction in their paychecks due to the lack of an extension of the payroll tax reduction. Each employee will see an increase in withholding of the social security portion of their payroll taxes that will rise to 6.2% from the 4.2% that has been in effect for the past two years. Self-employed individuals are also affected by the expiration of the payroll tax reduction and will see an increase in their self-employment tax for 2013. As a result, while the majority of taxpayers will not see an increase in their income taxes, they will see an increase in their overall federal tax liability, which includes payroll taxes.
The impact of this deal has a broad reach and will impact some taxpayers more than others. Following are a few of the key provisions contained in the Act:
The Act has made the lower Bush-era income tax rates permanent for all taxpayers, with the exception of individuals with taxable income above $400,000 ($450,000 married filing joint). These “high-income” individuals will see their tax top tax rate increase from 35% to 39.6% on ordinary income and an increase from 15% to 20% for capital gains and qualified dividends.
One of the taxpayer favorable provisions of the Act is a permanent “patch” for the alternative minimum tax (AMT) for 2012 and subsequent years. CCH reports that this patch will save over 60 million taxpayers from being subject to AMT on returns filed for the 2012 tax year.
The Act will also bring back limitations on certain itemized deductions and the phase out of personal exemptions for individuals with income above certain levels ($250,000 single/$300,000 married filing joint).
Estate and Gift
The Act makes permanent the $5 million estate tax exemption (adjusted annually for inflation), however, increases the top tax rate to 40% for decedents dying after December 31, 2012. The Act extends the unification of the exemption for estate and gift tax purposes, which allows an individual to make tax-free gifts during their lifetime against the $5 million exemption. The Act also makes the portability feature permanent. This allows the estate of the first spouse to die to transfer his/her unused estate tax exemption to the surviving spouse.
The Act extended many popular deductions and credits for businesses, including the following items now available through 2013:
- Section 179 $500,000 limit in 2012 as well as 2013 (subject to phase out)
- 50% Bonus Depreciation
- Research Tax Credit
- Work Opportunity Tax Credit
This is only a glimpse into all of the provisions contained in the American Taxpayer Relief Act of 2012. A more detailed summary of these provisions can be reviewed here through a CCH Tax Briefing.
Please contact us if you have any questions on how these changes will affect you or your business.