The American Taxpayer Relief Act of 2012: Some Tax Certainty in an Uncertain World

by Baker Donelson

On January 1, 2013, Congress averted the fiscal cliff with the passage of the American Taxpayer Relief Act of 2012 (Act), which was enacted when President Obama signed the Act on January 2, 2013. The Act provides a welcome degree of certainty about tax rates by eliminating the "sunset" provisions of the 2001 and 2003 tax cuts, though it includes tax increases on some higher income and net worth individuals.

For the past decade, uncertainty was ever present as to whether the lower tax rates included in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (together, known as EGTRRA) would sunset according to their terms at the end of 2010. Such uncertainty frustrated taxpayers and their advisors, creating an atmosphere which often paralyzed needed tax planning. Congress postponed the uncertain tax climate in late 2010, extending the EGTRRA lower rates for two additional years through 2012 in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Under the current Act, extension of lower tax rates are sometimes described as "permanent" because they are no longer subject to expire automatically after a period of time -- even though tax laws can, and almost certainly will, continue to change based on political pressures. The removal of the sunset provisions offers an increased degree of stability, however, and should bring some comfort to taxpayers and their advisors.

Following is a brief summary of many of the tax provisions within the Act. Stay tuned for more detailed analysis of specific provisions and planning opportunities under the Act in forthcoming Alerts.

Individual Income Taxes

Income Tax Rates: The Act permanently extends the reduced individual income tax rates under EGTRRA, so there will be no change to most individuals’ tax rates under the Act. But the Act imposes a 39.6 percent tax rate bracket for "high-income taxpayers" that applies to income over a threshold amount, which will be adjusted for inflation in future years. The initial threshold amounts are:

  • $400,000 for single individuals;
  • $450,000 for married individuals filing joint returns
  • $425,000 for heads of households; and
  • half of the married filing jointly threshold amount for married individuals filing separate returns.

The Act also permanently extends the "marriage penalty" reduction provisions that set the 15 percent regular income tax rate bracket for a married couple filing a joint return at 200 percent the corresponding rate bracket for an unmarried (single) individual.

The following tables illustrate the projected 2013 tax brackets under the Act for single individuals and for married individuals filing joint returns.

Table 1. Projected 2013 Rates - Single Individuals

Taxable Income Over
But Not Over
% on Excess
Of the amount over


Table 2. Projected 2013 Rates - Married Filing Jointly

Taxable Income Over
But Not Over
% on Excess
Of the amount over-

Capital Gains and Qualified Dividend Rates: Since 2003, taxpayers have enjoyed a maximum tax rate of 15 percent on long-term capital gains. In addition, qualified dividends received by individuals have been taxed at the capital gain rate rather than being treated as ordinary income. The Act permanently extends the 15 percent capital gains and dividend rates for most taxpayers. But the Act adds 20 percent capital gains and dividend rates for taxpayers with annual income in excess of the income tax threshold amounts described above (currently $400,000 for individuals and $450,000 for married individuals filing joint returns).

Alternative Minimum Tax (AMT): The Act permanently increases the AMT exemptions retroactively beginning with the 2012 tax year, and provides that the AMT exemptions will be indexed for inflation starting in 2013. As a result, Congress will hopefully no longer have to pass annual “patches” to prevent the AMT from applying to lower income taxpayers. The 2012 AMT exemption amounts are:

  • $50,600 for unmarried individuals;
  • $78,750 for married individuals filing joint returns; and
  • half of the married filing jointly exemption amount for married individuals filing separate returns.

Also, effective retroactively for tax years beginning with the 2012 tax year, the Act permanently allows nonrefundable personal credits to offset both regular tax liability and AMT liability.

Limitations on Itemized Deductions and Phase-Outs of Personal Exemptions: Beginning in 2013, itemized deductions of higher income taxpayers will be reduced by 3 percent of the amount by which the taxpayer’s adjusted gross income exceeds an applicable amount, but the reduction is limited to 80 percent of the otherwise allowable itemized deductions. This limitation does not apply to deductions for medical and dental expenses, investment interest and casualty and theft losses.

Also beginning in 2013, personal exemptions of higher income taxpayers will be reduced by 2 percent for each $2,500 (or portion thereof) by which the taxpayer's adjusted gross income exceeds the applicable amount.

The same applicable amounts are used to determine both the reductions of itemized deductions and the phase-outs of personal exemptions. The applicable amounts are indexed for inflation for years after 2013. The 2013 applicable amounts are:

  • $250,000 for single individuals;
  • $300,000 for married individuals filing joint returns;
  • $275,000 for heads of households; and
  • half of the married filing jointly applicable amount for married individuals filing separate returns.

Other Changes and Extensions: The Act includes extensions of a number of individual tax provisions, some of which are permanent, and others of which are temporary. The following are some of the provisions extended or otherwise modified by the Act:

  • Permanent and Temporary Extensions of Child Tax Credit: The maximum child tax credit is permanently continued at $1,000 and the credit remains refundable. The credit is generally refundable to the extent of 15 percent of the taxpayer's earned income above $10,000 (indexed for inflation). The Act also extends for five years (through 2017) the 2009 expansions of the credit allowing earnings above $3,000 to count toward refundability and including an alternative formula to calculate the credit for families with three or more qualifying children.
  • Permanent Extension of Expanded Credit for Dependent Care Expenses: The Act permanently extends the 35 percent applicable percentage used to determine the amount of expenses that are allowed as a credit and dollar limitations for qualified expenses to $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals.
  • Five Year Extension of Expanded Earned Income Tax Credit: The Act extends for five years (through 2017) the 2009 increase of the earned income tax credit for families with three or more children and increased income thresholds for phase-out of the credit for married individuals filing joint returns.
  • Permanent Extension of Increased Adoption Credit and Adoption Assistance Programs: The Act permanently extends the $10,000 adoption credit and $10,000 exclusion for adoption expenses paid by an employer.
  • Education Provisions:
    • Interest on Education Loans: The Act permanently extends EGTRRA's elimination of the 60-month limit for the above-the-line deduction of up to $2,500 of the interest on qualified education loans and the increased income thresholds for phase-outs of the deductions.
    • Qualified Tuition and Related Expense: The Act extends through 2013 the above-the-line deduction for qualified tuition payments and certain related expenses.
    • Coverdell Educational Savings Accounts: The Act permanently extends a number of favorable 2001 and 2004 changes to Coverdell education savings accounts (also known as Educational IRAs), including the increased maximum annual contributions of $2,000, an expanded definition of qualified education expenses that permits elementary and secondary education expenses to be paid from these accounts, and the allowance of current-year contributions until April 15 of the following year.
    • American Opportunity Tax Credit: The Act extends for five years (through 2017) the 2009 modifications to the American Opportunity Tax Credit that provides a partially-refundable tax credit for 100 percent of the first $2,000 of tuition and related expenses and up to 25 percent of the next $2,000 of tuition and related expenses, subject to a phase-out for taxpayers with income over $80,000 ($160,000 for married individuals filing joint returns).
    • Employer-Provided Educational Assistance: The Act permanently extends the exclusion by an employee of up to $5,250 per year of employer-provided educational assistance.
    • Exclusion of Scholarships: The Act permanently extends the inclusion of scholarships under the National Health Service Corps Scholarship Program and the F. Edward Herbert Armed Forces Health Professions Scholarship and Financial Assistance Program within scope of qualified scholarships that can be excluded from income by the recipient.
  • Extensions Through 2013: The Act extends through 2013 a number of temporary tax deductions, credits and incentives for individuals that expired at the end of 2011 or that would expire at the end of 2012. Following are some of the provisions that have been extended:
    • The above-the-line deduction for expenses up to $250 for educational materials purchased by elementary and secondary school teachers.
    • The exclusion from income of forgiven mortgage debt up to $2 million ($1 million if married filing separately).
    • The exclusion from income for employer-provided transit and vanpool benefits of up to $240 per month.
    • The deduction for qualified mortgage insurance premiums on a qualified personal residence, which is ratably phased-out for taxpayers with gross income between $100,000 and $105,000 (or between $50,000 and $55,000 for married taxpayers filing separate returns).
    • The permitted deduction of state and local sales taxes in lieu of deducting state and local income taxes.
    • The special rules increasing the limits on charitable deductions for contributions of capital gain real property for conservation purposes and for contributions by certain corporate farmers and ranchers.
    • The allowance of tax-free distributions of up to $100,000 per year to charities from an individual retirement account by taxpayers age 70 ½ or older. The Act also includes transition rules that allow taxpayers to treat distributions to charities made in January 2013 as having been made on December 31, 2012, and to treat distributions made in December 2012 that are paid to a charity in January 2013 as qualified charitable distributions.

Business Income Taxes

The following is a brief non-exhaustive summary of some of the Act's significant changes related to businesses.

R&D Credit: The Act reactivates the research and development tax credit which expired on December 31, 2011 retroactively for qualifying expenses incurred from January 1, 2012 through December 31, 2013. The rules for taxpayers under common control are modified under the Act for purposes of computing the R&D credit when a change of control occurs for a major portion of a trade or business.

Low-Income Tax Credit Rate for Non-Federally Subsidized Buildings: The Act reactivates the low-income tax credit of 9 percent for newly constructed non-federally subsidized buildings placed in service after July 30, 2008 for the housing credits allocated prior to January 1, 2014.

New Markets Tax Credits: The Act provides that the 2010 and 2011 new markets tax credits of $3.5 billion in qualified equity investments are to be carried forward and used in 2012 and 2013. Unused new market tax credits may be carried forward to 2018.

Work Opportunity Credit: The Act extends the work opportunity credit for individuals who were employed prior to January 1, 2014.

Qualified Zone Academy Bonds: The Act extends the $400 million in bond volume for 2012 and 2013. Qualified Zone Academy Bonds enable the holder a federal tax credit in lieu of interest.

15-Year Straight-Line Recovery for Qualified Leasehold Improvements: The Act extends the 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements placed in service before 2014.

Increased Expensing Limitation and Treatment of Qualified Property as Section 179 Property: The Act reinstates the special rules applying Section 179 to qualified real property and the allowance of $250,000 of the costs of the real property to be Section 179 through 2013.

Extension and Modification of Bonus Depreciation: The Act extends the Section 168(k) 50 percent bonus depreciation for qualified property acquired and placed in service prior to January 1, 2014. Additionally, the Act provides that corporate taxpayers may elect to accelerate the AMT and research credits instead of bonus depreciation.  

Special Expensing Rules for Certain Film and Television Productions: The Act extends the special expensing rules allowing film and television producers to expense the initial $15 million of productions costs of qualified film and television productions incurred prior to January 1, 2014.

Exclusion of 100 Percent of Gain on Small Business Stock: The Act extends the exclusion of gains from the sale of qualifying small business stock acquired prior to January 1, 2014 that is held at least five years. Generally, qualifying small business stock is C-corporation stock where the corporation's aggregate gross receipts are not in excess of $50 million and the corporation satisfies the active business requirements. The total amount of gain eligible for the exclusion is the greater of 10 times the taxpayer's basis in the stock or $10 million of gain from the sale of the small business stock.

Extension of Reduction in S-Corporation Recognition Period for Built-In Gains Tax: The Act extends the recognition period of five years for purposes of computing the recognition period for the built-in gains tax. The recognition period begins with the first day of the first taxable year for which the entity elected S-corporation status.

30 Percent Exemption of Certain Dividends of Regulated Investment Companies: The Act extends the exemption from the 30 percent withholding tax for qualified interest related dividends and short term capital gain dividends under the Foreign Investment in Real Property Act.

Estate and Gift Taxes

Inflation-Indexed and Portable $5 Million Exemption is Now Permanent: The Act makes the $5 million unified exemption for gift, estate and generation-skipping transfer taxes permanent, and the exemption continues to be indexed for inflation. The unified exemption for 2013 is projected to be $5.25 million, up from the 2012 indexed unified exemption amount of $5.12 million. The Act also permanently extends portability of the unified exemption, which allows a surviving spouse to make use of a deceased spouse's unused unified exemption, and which was first introduced in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Increase in Tax Rate for High Wealth Individuals: The Act increases the maximum transfer tax rate to 40 percent in 2013, from the 35 percent maximum rate applicable to transfers made in 2011 and 2012.


This Alert is intended to be a general review of some of the tax provisions of the Act, and is not intended as advice under any specific facts and circumstances. Tax planning in these uncertain times starts with an understanding of your specific facts and circumstances. As a result, taxpayers should consider consulting with their tax advisors to discuss how the Act will impact them and strategies available to them now that the Act has passed.

If you have any questions regarding any of the Act's provisions summarized above, or questions relating to any other tax topics, please contact any of the following attorneys in the Firm's Tax Department:

Atlanta, Georgia
Nedom A. Haley 404.221.6505
Robert G. Brazier 404.221.6506
Michael M. Smith 404.589.3419
Michael S. Evans 404.221.6517

Nashville, Tennessee
Scott D. Smith 615.726.7391
Carolyn W. Schott 615.726.7312
Richard D. Bird 615.726.7327
Daniel A. Stephenson 615.726.5678

Memphis, Tennessee
William H.D. Fones Jr. 901.577.2247
Paul R. O'Rourke 901.577.2313
Mary Ann Jackson 901.577.8113
Charles Eldon Pierce 901.577.2164

East Memphis, Tennessee
James R. (Josh) Hall Jr. 901.579.3126
Christopher J. Coats 901.579.3127

Chattanooga, Tennessee
Carl E. Hartley 423.756.2010
Virginia C. Love 423.209.4118
Philip B. Whitaker 423.209.4118
William E. Robinson 423.209.4107
Sara Elizabeth McManus 423.209.4124

Knoxville, Tennessee
L. Eric Ebbert 865.971.5182

Birmingham, Alabama
Thomas J. Mahoney Jr. 205.250.8346
Robert T. Gardner 205.250.8373
Andrea B. Powers 205.244.3809
Adam Sidney Winger 205.250.8381

Jackson, Mississippi
James K. Dossett Jr. 601.351.2482
Stacy E. Thomas 601.351.2484
Leonard (Len) C. Martin 601.351.2453
David P. Webb 601.969.4678
Jon D. Seawright 601.351.8921
C. Tyler Ball 601.351.8959

Orlando, Florida
Donald E. Christopher 407.367.5402
Richard C. Swank 407.367.5404
Martha A. Hartley 407.367.5427

Houston, Texas
Brad Chambers 713.286.7193

New Orleans, Louisiana
Robert L. Wollfarth 504.566.8623

Baton Rouge, Louisiana
Alton E. (Biff) Bayard III 225.381.7019

Washington, D.C.
James W. McBride 202.508.3467


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.

© Baker Donelson | Attorney Advertising

Written by:

Baker Donelson

Baker Donelson on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.