The American Taxpayer Relief Act of 2012: What It Means for You and Your Business
Congress has recently passed The American Taxpayer Relief Act of 2012 that effectively averts the tax side of the fiscal cliff. The U.S. Senate overwhelmingly passed legislation to avert the so-called fiscal cliff on January 1, 2013 by a vote of 89 to 8, sending the American Taxpayer Relief Act of 2012 (HR 8, as amended by the Senate) to the House, where it was similarly approved by a vote of 257 to 167. President Obama said that he will sign this legislation as soon as it reaches his desk.
The legislation includes both tax and nontax features. We’d like to share with you some of the act’s main tax features so you have a better understanding of how you and your business will be affected. Because
the tax landscape is complicated and ever changing, please contact Simons Bitzer at (317) 782-3070 with any questions or concerns you have.
INDIVIDUAL INCOME TAX RATES
The American Taxpayer Relief Act of 2012 makes permanent for 2013 and beyond the lower Bush-era income tax rates for all, except for taxpayers with taxable income above $400,000 ($450,000 for married
taxpayers, $425,000 for heads of households). Income above these levels will be taxed at a 39.6 percent rate.
The IRS is expected to release official 2013 tax rate tables shortly now that legislation has resolved the uncertainty surrounding the rates.
CAPITAL GAINS/DIVIDENDS SUNSETS
The American Taxpayer Relief Act raises the top rate for capital gains and dividends to 20 percent, up from the Bush-era maximum 15 percent rate. That top rate will apply to the extent that a taxpayer’s
income exceeds the thresholds set for the 39.6 percent rate ($400,000 for single filers; $450,000 for joint filers and $425,000 for heads of households).
All other taxpayers will continue to enjoy a capital gains and dividends tax at a maximum rate of 15 percent. A zero percent rate will also continue to apply to capital gains and dividends to the extent income
falls below the top of the 15 percent income tax bracket—projected for 2013 to be $72,500 for joint filers and $36,250 for singles). Qualified dividends for all taxpayers continue to be taxed at capital gains rates,
rather than ordinary income tax rates as prior to 2003.
PERMANENT AMT RELIEF
The American Taxpayer Relief Act “patches” the AMT for 2012 and subsequent years by increasing the exemption amounts and allowing nonrefundable personal credits to the full amount of the individuals
regular tax and AMT. Additionally, the American Taxpayer Relief Act provides for an annual inflation adjustment to the exemption amounts for years beginning after 2012.
PEASE LIMITATION
The American Taxpayer Relief Act officially revives the “Pease” limitation on itemized deductions, which was eliminated by EGTRRA as extended by the 2010 Tax Relief Act. However, higher “applicable
threshold” levels apply under the new law:
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$300,000 for married couples and surviving spouses;
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$275,000 for heads of households;
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$250,000 for unmarried taxpayers; and
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$150,000 for married taxpayers filing separately.
PERSONAL EXEMPTION PHASEOUT
The American Taxpayer Relief Act also officially revives the personal exemption phaseout rules, but at applicable income threshold levels slightly higher than in the past:
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$300,000 for married couples and surviving spouses;
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$275,000 for heads of households;
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$250,000 for unmarried taxpayers; and
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$150,000 for married taxpayers filing separately.
Under the phase-out, the total amount of exemptions that may be claimed by a taxpayer is reduced by two percent for each $2,500, or portion thereof (two percent for each $1,250 for married couples filing
separate returns) by which the taxpayer’s adjusted gross income exceeds the applicable threshold level.
FEDERAL ESTATE AND GIFT TAXES
The American Taxpayer Relief Act provides a 40 percent tax rate and a unified estate and gift tax exemption of $5 million (inflation adjusted) for gifts made after 2012.
STATE AND LOCAL SALES TAX DEDUCTION
The American Taxpayer Relief Act extends through 2013 the election to claim an itemized deduction for state and local general sales taxes in lieu of state and local income taxes.
CHILD TAX CREDIT
The American Taxpayer Relief Act extends permanently the $1,000 child tax credit. Certain enhancements to the credit under Bush-era legislation and subsequent legislation are also made permanent.
EARNED INCOME CREDIT
The American Taxpayer Relief Act makes permanent or extends through 2017 enhancements to the earned income credit (EIC) in Bush-era and subsequent legislation. The enhancements to the EIC made
by Bush-era and subsequent legislation include (not an exhaustive list) a simplified definition of earned income, reform of the relationship test and modification of the tie-breaking rule. The IRS also has
additional authority with respect to mathematical errors.
OTHER EDUCATION INCENTIVES
The American Taxpayer Relief Act makes permanent or extends a number of enhancements to tax incentives designed to promote education. Many of these enhancements were made in Bush-era legislation, extended by subsequent legislation and are scheduled to expire after 2012. Some
enhancements, notably the American Opportunity Tax Credit, had been made in President Obama’s first term.
BUSINESS TAX PROVISIONS
Many popular but temporary tax extenders relating to businesses are included in the American Taxpayer Relief Act. Among them is Code Sec. 179 small business expensing, bonus depreciation, the research
tax credit, and the Work Opportunity Tax Credit.
Research Tax Credit
The American Taxpayer Relief Act extends through 2013 the Code Sec. 41 research tax credit, which expired after 2011. The incentive rewards taxpayers that engage in qualified research activities with a tax
credit.
Section 179 Expense
The Section 179 deduction, which provides for immediate expensing of qualifying assets, was scheduled for a significant drop in 2012 and beyond. The provision allowed for the immediate write-off of up to
$500,000 in assets in 2011, but only $139,000 in 2012 and $25,000 in 2013. The legislation has increased the limit back to $500,000 for 2012 and 2013. “This is significant for our business customers,” emphasizes Greg Simons, principal.
Bonus Depreciation
The American Taxpayer Relief Act extends 50 percent bonus depreciation through 2013. Some transportation and longer period production property is eligible for 50 percent bonus depreciation through 2014.
Leasehold, Retail and Restaurant Property
The American Taxpayer Relief Act extends for 2012 and 2103 the special treatment of qualified leasehold and retail improvement property and qualified restaurant property as eligible for a 15-year recovery
period. Otherwise, this property generally is depreciated over a 39-year recovery period. To take advantage of this enhanced expensing, the qualified property must be placed in service before January 1, 2014.
“Many of these business tax incentives are temporary, so taxpayers have a limited window in which to maximize their potential tax savings,” states Joan Brockman, CPA. The Simons Bitzer tax specialists are
ready to assist you with your tax planning and preparation needs. Contact us at (317) 782-3070