Below is a summary of the bill passed late on New Year’s Day, formally known as The American Taxpayer Relief Act of 2012.
Tax rates beginning January 1, 2013
Tax rates stayed at the 2012 rates except for the top rate of 35%. This rate was increased to 39.6% on taxpayers making the following amounts; individuals making more than $400,000 a year, $425,000 for head of household, and $450,000 for married filing joint.
Phase-out of itemized deductions and personal exemptions
The personal exemption and itemized deduction phase-out is reinstated, but with different AGI starting thresholds (adjusted for inflation): $300,000 for married filing joint, $275,000 for head of household, and $250,000 for single. This means the total amount of exemptions or itemized deductions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 by which the taxpayer’s AGI exceeds the applicable threshold.
Dividends and capital gains
The maximum capital gains tax will permanently rise from 15% to 20% for individuals taxed at the 39.6% rates (those making $400,000, $425,000, or $450,000 depending on filing status, as noted above). When adding the 3.8% surtax on investment-type income and gains, the overall rate for higher-income taxpayers will be 23.8%. For taxpayers whose ordinary income is generally taxes at a rate below 25%, capital gains and dividends will permanently be subject to a 0% rate. For those in the middle, the 15% rate is retained.
Alternative minimum tax
The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Relief from AMT for nonrefundable credits is retained.
Other personal deductions and exclusions
The following deductions and exclusions are extended and made retroactive for 2012 if they had already expired:
- Child and dependent care credit rules are permanently extended ($3,000 of expenses for one dependent or up to $6,000 for more than one;
- American opportunity tax credit was extended through 2018;
- Above the line deduction for qualified tuition and related expenses was extended through 2013;
- The $1,000 Child Tax Credit and the enhanced Earned Income Tax Credit are extended through 2018;
- Discharge of qualified principal residence exclusion was extended through 2013;
- $250 above-the-line teacher deduction was extended through 2013;
- Mortgage insurance premiums treated as residence interest was extended through 2013;
- Deduction for state and local taxes was extended through 2013;
- IRA-to-charity exclusion was extended through 2013 (plus special provisions allowing transfers made in January 2013 to be treated as made in 2012).
The estate tax regime will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples) but will be applied at a higher 40% rate (up from 35% in 2012).
2% Social Security reduction gone
The decrease in employee Social Security to 4.2% was allowed to expire. The rate reverts back to 6.2%.
Contact us for any questions you may have about how this affects you.