American Taxpayer Relief Act Resolves “Fiscal Cliff” Tax Uncertainties

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After intense negotiations, the Senate passed the “American Taxpayer Relief Act” (the Act) by a vote of 89-8 in the early morning hours of January 1, 2013.  Later that day, the House of Representatives passed the same bill (H.R. 8), by a vote of 257 to 167.  President Obama has indicated that he will sign the bill making it law.

In previous communications, we have detailed out the potential consequences of a lack of action by the government, as well as some speculation as to a possible resolution, which can be found at our blog here, along with some additional background about the issue. 

After much speculation and uncertainty about 2013 tax laws, the Act provides clarity for 2013, as well as providing some permanent resolution to some tax provisions that have required annual legislation to extend. 

Highlights of the tax provisions of the Act include the following:

  • Tax Rates – A top rate of 39.6% (up from 35%) will be imposed on individuals making more than $400,000 per year, and $450,000 for taxpayers who are married filling joint.
  • Dividends and Capital Gains – The maximum capital gains tax rate applicable to long-term capital gains and qualified dividends will rise from 15% to 20% for individuals taxed at the 39.6% rates, as noted above.
  • 2% Social Security Reduction Gone – The temporary 2% reduction in the employee portion of social security tax has expired effective December 31, 2012.  This means that employee paychecks will be going down immediately.
  • AMT Permanently Patched – The Alternative Minimum Tax exemption amount has been permanently “patched” to $50,600 for single taxpayers and $78,750 for taxpayers who are filing joint.  Additionally, beginning in 2013 the exemption amount will be indexed for inflation.
  • Itemized Deduction and Personal Exemption Phase-Outs – The phase-out reductions for itemized deductions and personal exemptions are reinstated beginning in 2013.  Personal exemptions will be phased out by 2% for each $2,500 by which a joint taxpayer’s adjusted gross income exceeds $300,000.  Additionally, a joint taxpayer’s total itemized deductions will now be reduced by 3% of the amount by which the taxpayers’ adjusted gross income exceeds $300,000.
  • Transfer Tax – The exemption for estate and gift taxes was left alone at an inflation adjusted $5 million per taxpayer, but the top estate tax rate was raised from 35% to 40%. 
  • Other Individual Tax Provisions – The following deductions and exclusions are extended through 2013:
    • Discharge of qualified principal residence exclusion;
    • $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).
  • Other Business Provisions
    • 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;
    • Bonus depreciation extended through 2013; and
    • The §179 deduction limitation is $500,000 for 2012 and 2013.

Please do not hesitate to contact us if you have any questions about this, or any other matter.

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