New Year's Day Federal Tax Legislation

by Manatt, Phelps & Phillips, LLP

On January 1, 2013, the House and Senate approved the American Taxpayer Relief Act of 2012 (H.R. 8, as amended by the Senate) (the "2012 Tax Relief Act").

The 2012 Tax Relief Act, signed into law by President Obama on January 2, 2013, resolves nearly all of the "fiscal cliff" tax issues and provides much-needed federal income and estate tax certainty.

The following is a brief overview of the material provisions that will be effective starting in 2013 resulting from passage of the 2012 Tax Relief Act:

Income Tax

  • The most favorable long-term capital gains rate and qualified dividend rate will be 20% (up from the maximum 15% tax rate applicable prior to 2013) for taxpayers with taxable income (that is, net of deductions) in excess of $400,000 ($450,000 for joint filers and $425,000 for heads of household).  All others will continue to enjoy a 15% maximum long-term capital gains rate and qualified dividend rate.
  • The highest marginal individual tax rate for ordinary income will be 39.6% (up from the maximum 35% tax rate applicable prior to 2013) for taxpayers with taxable income in excess of $400,000 ($450,000 for joint filers and $425,000 for heads of household).  All other individual taxpayers will continue to enjoy a 35% maximum ordinary income rate.
  • The alternative minimum tax exemption amounts (often referred to as the "AMT Patch") is now permanent and will be inflation adjusted annually.
  • The availability of many favorable business tax provisions, including 50% bonus depreciation for qualified property, higher Section 179 small business expensing dollar limits, research tax credits and Work Opportunity Tax Credit, has been extended through 2013.
  • Limitations on itemized deductions and phase-out of personal exemptions are reinstated but with higher threshold levels ($300,000 for joint filers and surviving spouses, $275,000 for heads of household and $250,000 for unmarried individuals).

Payroll Tax

  • The existing employee-side payroll tax reduction from 6.2% to 4.2% was not extended.  Likewise, self-employed individuals will see an increase from 10.4% to 12.4% on self-employment taxes.

Estate and Gift Tax

  • The $5 million per spouse exemption (with an annual inflation adjustment) from estate and generation-skipping transfer and the ability of a spouse to use the unused portion, if any, of a predeceased spouse's exemption are now permanent.
  • The top estate and gift tax rate is 40% (up from the maximum 35% rate effective for 2012 but less than the 55% maximum rate scheduled to go into effect but for the passage of the 2012 Tax Relief Act).

The 2012 Tax Relief Act brings an end to the tax portion of the "fiscal cliff" tax standoff and thereby provides much-needed certainty for individual and business tax planning starting in 2013.  The debate on spending cuts will continue, however, as the 2012 Tax Relief Act merely delayed for two months the automatic spending cuts that would have been triggered by "sequestration."

If you would like more detailed information concerning any of these changes in federal tax law, please do not hesitate to contact us.


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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