Understanding the American Taxpayer Relief Act of 2012


The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013. The Act permanently extends many of the Bush-era tax cuts, while increasing tax rates for higher income taxpayers. Below is a brief summary of the major provisions of the Act:

Tax rates
Tax rates will remain the same for taxpayers with Adjusted Gross Income (AGI) under the following thresholds: $400,000 (single filers), $425,000 (heads of household), $450,000 (married filing joint and surviving spouses) and $225,000 (married filing separate). For taxpayers with AGI above these amounts, there is now an additional tax bracket of 39.6%.

Similarly, the top tax rate on dividend and capital gain income has changed from 15% to 20% for taxpayers with income over the same thresholds listed above. The 15% rate is still in place for those with income under these amounts.

Alternative Minimum Tax (AMT) Relief
The Act provides permanent relief from the individual AMT. For 2012, the exemption amounts have increased to $50,600 for unmarried filers and $78,750 for joint filers ($39,350 for married filing separate). The Act also allows nonrefundable personal credits to be applied to AMT beginning in 2012.

Personal Exemption and Itemized Deduction Phase-out
The Act permanently repeals the phase out of personal exemptions and itemized deductions for taxpayers with AGI over $250,000 (single filers), $275,000 (heads of households), $300,000 (married filing jointly and surviving spouse), and $150,000 (married filing separate). These amounts are adjusted annually for inflation. For those with income over these amounts, the phase-outs will apply.

Other Deductions
The deduction for state and local general sales taxes has been extended through 2013.

The Act also extends the above-the-line deduction for qualified tuition expenses through 2013 as well (maximum deductions based on income thresholds remain the same).

Estate Tax Rates
The Act permanently extends the unified estate and gift tax rates that were in effect for 2012, with the exception that a top tax rate of 40% (up from 35%) will apply to cumulative gifts and taxable estates above the exemption amount. The exemption amount remains at $5 million, as adjusted for inflation. For 2012, the exclusion is $5,120,000; for 2013, it’s $5,250,000.

Payroll tax
The new law does not extend the 2% reduction in payroll taxes in effect for 2011 and 2012.

New Healthcare Taxes Effective in 2013
Enacted in the Patient Protection and Affordable Care Act of 2010, these taxes became effective January 1, 2013. An additional 0.9% Medicare tax on wages and self-employment income will apply to income over $250,000 for married taxpayers ($200,000 for single filers; $125,000 married filing separate).

The 2010 Act also added a 3.8% tax on certain types of net investment income. For individuals, the tax is imposed on the lesser of 1) the individual’s net investment income or 2) the excess of modified AGI over $250,000 for taxpayers filing a joint return ($200,000 for single filers and $125,000 for married filing separate returns).

If you would like more details about these provisions or any other aspect of the new law, please contact W. King Copler.

IRS Circular 230 requires us to inform you that any statements contained in this communication are not intended or written to be used, and cannot be used, by you or any other taxpayer for the purpose of avoiding any penalties that may be imposed by federal tax law.

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.

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