Key Provisions Of The American Taxpayer Relief Act

by Charles (Chuck) Rubin
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Below is a summary of many of the key provisions of the Act. Interesting how the Act, when netted with the repeal of the Bush tax cuts, results in a large increases in income taxes – yet Congress still calls the this a “relief” act!

1. Individual Income Tax Rates. Retained at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6% as would have occurred under the EGTRRA sunset). A 39.6% rate applies to income above a certain threshold (specifically, income in excess of the “applicable threshold” over the dollar amount at which the 35% bracket begins). The applicable threshold is $450,000 for joint filers and surviving spouses, $425,000 for heads of household,  $400,000 for single filers,  and $225,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. These dollar amounts are inflation-adjusted for tax years after 2013.

COMMENT: There is  a MAJOR marriage penalty here. Two single people living together would get two $400,000 exemptions (one each). A married couple gets hit when combined income exceeds $450,000. Perhaps some of those same-sex couples that are married under state law will not be happy now if the Supreme Court rules that they should be subject to the same tax rules as other married persons.

2. Personal Exemption Phaseout. Personal exemptions begin to phase out for those making $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. The total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer's AGI exceeds the applicable threshold. This is inflation-adjusted for tax years after 2013.

COMMENTS: Another big marriage penalty here. This phaseout, along with the itemized deduction phase-out, will increase the income taxes of persons below the $400,000/$450,000 amounts being bandied about in the media.

3. Itemized Deduction Phaseout. Itemized deductions are reduced by 3% of the amount by which the taxpayer's adjusted gross income (AGI) exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. The starting thresholds are $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Inflation adjustments apply after 2013.

COMMENTS: See 2. above.

4. Capital Gain and Dividend Rates. The top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will permanently be subject to a 0% rate. Taxpayers who are subject to a 25%-or-greater rate on ordinary income, but whose income levels fall below the $400,000/$450,000 thresholds, will continue to be subject to a 15% rate on capital gains and dividends.

COMMENTS: Don’t forget that the new 3.8% Obamacare taxes will also now apply to these items. The retreat from the threatened imposition of ordinary income rates on dividends is a big break here. The permanent nature of the lower dividend rate also encourages further use of the IC-DISC for those engaged in export transactions. Another hidden marriage penalty here, too.

5. Estate and Gift Tax Rates. The maximum rates are increased to 40%.

COMMENT: Well, its much better than the 55% rate that was scheduled to apply.

6. Unified Credit for Transfer Taxes/GST Exemption. Retained at $5 million, as adjusted for inflation. For 2013, this amount has been estimated at $5.25 million. Portability of unused credit between spouses has also been retained.

COMMENT: An unexpected “gift.” For those that feel they should not have entered into late 2012 gifting to use their credit before it was scheduled to be dramatically reduced, remember that for most of you good planning still resulted - future income and growth on those assets you gave away has been removed from your future taxable estates. The retention of the high credit amount makes prior concerns about “clawback” on prior gifts pretty much moot for now.

7. AMT Relief. Relief has been made permanent by a permanent increase in exemption amounts, and the index of those amounts with inflation. This should minimize the creep of more and more taxpayers into the AMT.

COMMENT: At last! However, getting rid of the AMT or higher exemption amounts would have been even better.

8. Extension through 2013 (and to include 2012) for tax-free distributions from individual retirement plans for charitable purposes.

COMMENT: Thanks, but what the heck is with these temporary extensions? Permanent relief here would be most appreciated.

9. Extension to January 1, 2014 for Subpart F exception for active financing income for controlled foreign corporations.

COMMENT: Again with the temporary extension?

10. Extension of look-through treatment of payments between related controlled foreign corporations under foreign personal holding company rules.

COMMENT: Again with the temporary extension?

11. Extension of 5 year built-in gains tax period for S corporations through 2013.

COMMENT: Again with the temporary extension?

12. Payroll Tax Cut Allowed to Expire. While technically not part of the new law, Congress has let the temporary reduction in payroll taxes expire.

COMMENT: Wage earners in all brackets will feel the pain of this expiration in their take-home pay starting now.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Charles (Chuck) Rubin, Gutter Chaves Josepher Rubin Forman Fleisher P.A. | Attorney Advertising

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