American Tax Relief Act of 2012

Congress has passed a bill that makes a number of changes to the income tax law.  Some of the changes affect only 2013 and subsequent years.  Some are effective January 1, 2012; more than one year ago.  Here is a very short summary of some of the major provisions.  Ask your accountant for more details if any of these changes affects you.

Provisions Affecting Individuals

Individual Income Tax Rates:  For single taxpayers with taxable income under $400,000 and married taxpayers with taxable income under $450,000, the old rates continue to apply.  Single taxpayers with more than $400,000 or married taxpayers with more than $450,000 of taxable income will be subject to a new 39.6% rate.  This change is effective January 1, 2013.

Capital Gains and Qualified Dividends:  The maximum tax rate on long-term capital gains and qualified dividends increases to 20% to the extent that taxable income exceeds $400,000 for single taxpayers and $450,000 for married taxpayers.  The 15% (and 0% for taxpayers in the 15% tax bracket) rates continue to apply as before for all other taxpayers.  This change is effective January 1, 2013.

Net Investment Income:  Starting in 2013, married taxpayers with more than $250,000 of income (over $200,000 for single taxpayers) will pay an additional 3.8% tax on net investment income.  This change comes from the health care law and increases the effective long term capital gain rate to 23.8% for high income taxpayers.

Alternative Minimum Tax:  The exemption amount has been fixed retroactively to January 1, 2012.  The amount of the exemption that had been in effect since then would have caused approximately 60 million additional taxpayers to owe this extra tax.  The new exemption amount is permanent, so it will not continually expire without renewal, and it is indexed for inflation.

Itemized Deduction Limitation:  Beginning in 2013, married taxpayers with more than $300,000 and single taxpayers with more than $250,000 of adjusted gross income must reduce their itemized deductions by 3% of the amount of their AGI in excess of the threshold amount.  This provision had been phased out several years ago.  

Personal Exemption Phaseout:  Also beginning in 2013, and similar to the itemized deduction phaseout above, personal exemptions will be phased out for taxpayers with AGI exceeding $300,000 for married couples and $250,000 for singles.  The taxpayers’ exemptions will be reduced by 2% of the excess of AGI over the threshold amounts.  This provision had also been phased out several years ago.

Federal Estate and Gift Taxes:  The law provides a new “permanent” 40% tax rate and unified estate and gift tax exemption of $5 million for decedents dying after December 31, 2012 and gifts made after 2012.

State and Local Sales Tax Deduction:  This deduction had expired at the end of 2011 but has now been retroactively restored for 2012 and extended through December 31, 2013.

Child Tax Credit:  This $1,000 per child credit would have been reduced to $500 beginning in 2013.  It has now been made “permanent” at the $1,000 amount.  The law does not allow for future increases based on inflation.

American Opportunity Tax Credit:  This $2,500 (maximum) credit for the first four years of a student’s post-secondary education has been extended through 2017.  

Teachers’ Classroom Expense Deduction:  Qualified primary and secondary education professionals may deduct up to $250 of qualified expenses paid out-of-pocket during the year.  This law retroactively reinstates this deduction for 2012 and extends it through 2013.

Exclusion of Cancellation of Indebtedness on Principal Residence:  This exclusion is extended for one year, through 2013.

IRA Distributions to Charity:  Individuals who are age 70 ½ may make tax-free distributions from individual retirement accounts directly to public charities up to a maximum of $100,000 per year.  The law extends this provision for 2012 and 2013.  Since the extension for 2012 occurred after the end of the year, there is a special provision which allows January 2013 distributions to be treated as if they had been made on December 31, 2012.  Also, a December 2012 distribution may qualify as tax-free if transferred to a charity during January 2013.

Energy Efficiency Credits:  A modest credit with a lifetime limit of $500 is available for some energy efficiency improvements to the taxpayers’ principal residence

Provisions Affecting Businesses

Code Section 179 Expensing:  The limit, which would have been $139,000 for 2012, has been increased for 2012 and 2013 to $500,000 (subject to limitations on total purchases and net income).  The amount that can be expensed is now scheduled to be reduced to $25,000 beginning in 2014.

Bonus Depreciation:  For qualifying property, 50 percent bonus depreciation has been extended through 2013.

Not Renewed

Employee Social Security Taxes:  A provision which had reduced the employee share of Social Security tax from 6.2% to 4.2% has expired as of December 31, 2012.  This reversion will immediately affect take-home pay for wage earners.  It will also affect the amount of self-employment tax due for self-employed individuals.