The American Tax Relief Act of 2012 has been passed, let's find out what that means for you and your taxes...
from the legislation
Absent from the American Taxpayer Relief Act was the extension of the 2% reduction to the payroll tax
that reduced the employee portion of the payroll tax from 6.2% to 4.2% for the
last 2 years. As a result, as of January 1, 2013 the tax is back to 6.2%, a 2%
tax hike for all workers earning under $113,700. The social security portion of
the self-employment tax increases from 10.4% to 12.4% making the total SE tax 15.3%.
Benefits of the American Taxpayer Relief Act
Tax rates. For tax years beginning after 2012, the income tax rates
for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving
to 15%, 28%, 31%, 36% and 39.6% ), but with a 39.6% rate applying to taxpayers
whose taxable income is $450,000 for joint filers and surviving spouses;
$425,000 for heads of household; $400,000 for single filers; and $225,000 for
married taxpayers filing separately. These dollar amounts are
inflation-adjusted for tax years after 2013.
Personal Exemption Phaseout limitations. For tax years beginning after 2012, the Personal Exemption
Phaseout is reinstated with a starting threshold 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 for married taxpayers filing separately. Under
the phaseout, 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. These dollar
amounts are inflation-adjusted for tax years after 2013.
Itemized Deduction limitations. For tax years beginning after 2012, the itemized deduction
limitation on itemized deductions, is reinstated with a starting threshold 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 for married
taxpayers filing separately. Thus, for taxpayers subject to the limitation, the total amount of their
itemized deductions is reduced by 3% of the amount by which the taxpayer's
adjusted gross income exceeds the threshold amount, with the reduction not to
exceed 80% of the otherwise allowable itemized deductions. These dollar amounts
are inflation-adjusted for tax years after 2013.
Capital gain and dividend rates. For tax years beginning after 2012, 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
that the 3.8% surtax on investment-type income and gains will also apply so the
overall rate for taxpayers in this income level will be 23.8%.
For taxpayers in tax brackets 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. The rate will be
18.8% for those subject to the surtax.
Permanent AMT relief. For tax years beginning after 2011, the Act permanently
increases the AMT exemption amounts to $50,600 for unmarried taxpayers, $78,750
for joint filers and $39,375 for married persons filing separately. In
addition, for tax years beginning after 2012, it indexes these exemption
amounts for inflation.
Recovery Act extenders. The Act extends for five years the following items that
expired December 31, 2012:
-the American Opportunity tax credit, which permits eligible
taxpayers to claim a credit equal to 100% of the first $2,000 of qualified
tuition and related expenses, and 25% of the next $2,000 of qualified tuition
and related expenses (for a maximum tax credit of $2,500 for the first four
years of post-secondary education);
-the $3,000 income level for claiming the refundable child
-expansion of the higher earned income tax credit amounts for
eligible taxpayers with three or more children, and increases in threshold
phaseout amounts for singles, surviving spouses, and heads of households.
Historical individual extenders. The Act extends the following items for the period
indicated beyond their prior termination date as shown in the listing:
-the deduction on Form 1040 of up to $250 for certain
expenses of elementary and secondary school teacher is revived for 2012 and
continued through 2013;
-the exclusion from income of cancelled debt on a qualified
principal residence is extended to debt cancelled before Jan. 1, 2014;
-parity for the exclusions for employer-provided mass
transit and parking benefits is continued through 2013;
-the treatment of mortgage insurance premiums as qualified
residence interest is continued through 2013;
-the option to deduct State and local general sales taxes continued
-the deduction for qualified tuition and related expenses on
Form 1040 is continued through 2013; and
-tax-free distributions from individual retirement plans for
charitable purposes is continued through 2013. Because 2012 has already passed,
a special rule permits distributions taken in 2012 to be transferred to
charities for a limited period in 2013. Another special rule permits certain
distributions made in 2013 as being deemed made on Dec. 31, 2012.
Depreciation provisions modified and
extended. The following depreciation
provisions are retroactively extended by the Act through 2014:
-15-year straight line cost recovery for qualified leasehold
improvements, qualified restaurant buildings and improvements, and qualified
-increased expensing limitations (section 179) and treatment
of certain real property to $500,000.
The 50% bonus depreciation provision
for qualified property has been extended for 1 year for property placed in
service after Dec. 31, 2012.
Energy-related tax breaks extended. Various energy credits are extended. These include:
The nonbusiness energy property credit for energy-efficient existing homes is
retroactively extended for two years through 2013. A taxpayer can claim a
10% credit on the cost of: (1) qualified energy efficiency improvements,
and (2) residential energy property expenditures, with a lifetime credit
limit of $500 ($200 for windows and skylights).
- The alternative fuel vehicle refueling property credit is retroactively extended for two years through
2013 so that taxpayers can claim a 30% credit for qualified alternative
fuel vehicle refueling property placed in service through Dec. 31, 2013,
subject to the $30,000 and $1,000 thresholds.
- The credit for 2- or 3-wheeled plug-in electric
vehicles is modified and retroactively extended for two years through
- The cellulosic biofuel producer credit is modified and
extended one year through 2013.
- The credit for biodiesel and renewable diesel is
retroactively extended for two years through 2013.
- The credit for energy-efficient new homes is
retroactively extended for two years through 2013. Applies to builders.
- The credit for energy-efficient appliances is
retroactively extended for two years through 2013. Applies to
Pension provision. For transfers after Dec. 31, 2012, in tax years ending
after that date, plan provisions in an applicable retirement plan (which
includes a qualified Roth contribution program) can allow participants to elect
to transfer amounts to designated Roth accounts with the transfer being treated
as a taxable qualified rollover contribution.
Transfer tax provisions kept intact
with slight rate increase. The Act
makes permanent the exemption level of $5,000,000 (as indexed for inflation)
and increases the top estate, gift and rate from 35% to 40%. The Act also
continues the portability feature that allows the estate of the first spouse to
die to transfer his or her unused exclusion to the surviving spouse. All
changes are effective for individuals dying and gifts made after 2012.