Summary of the American Taxpayer Relief Act of 2012
On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law. The Act prevented many of the tax increases that were set to go into effect this year and extended many favorable tax breaks that would have otherwise expired. However, it also increased tax rates and put higher limitations on deductions for high-income individuals. Below is a summary of some of the key changes made by the 2012 Taxpayer Relief Act:
Individual Tax Provisions:
- Retains the 2012 tax rates for taxpayers earning less than $450,000 for joint filers and surviving spouses, $425,000 for head of household filers, $400,000 for single filers and $225,000 for married filing separate filers. Tax rates for these individuals were set to increase prior to the passing of the 2012 Taxpayer Relief Act.
- Increases the top tax rate to 39.6% for individuals exceeding the thresholds mentioned above.
- Increases the long-term capital gain and dividend tax rates to 20% for taxpayers with incomes exceeding the thresholds above (so a 23.8% rate applies in 2013 to higher income individuals, counting the 3.8% Medicare Contribution Tax from the Health Care Act).
- Provides permanent AMT relief by increasing the exemption amounts to $50,600 for single filers, $78,750 for joint filers and $39,375 for married persons filing separately, to be indexed for inflation after 2012.
- Reinstates the personal exemption phase-out for taxpayers earning more than $300,000 for joint filers and surviving spouses, $275,000 for head of household filers, $250,000 for single filers and $150,000 for married filing separate filers.
- Reinstates itemized deduction limitations, called the “Pease Limitation” for higher income taxpayers. The limitation applies to taxpayers with income of more than $300,000 for joint filers and surviving spouses, $275,000 for head of household filers, $250,000 for single filers and $150,000 for married filing separate filers. Taxpayers subject to the limitation will have their total itemized deductions reduced by 3% of the amount by which their AGI exceeds the threshold amount. However, the reduction cannot exceed 80% of the amount of otherwise allowable itemized deductions.
- Certain personal nonrefundable credits can offset regular tax as well as AMT. Previously, certain credits could only reduce regular tax. This new law is retroactive to tax years beginning after 2011 and is permanent.
- Extends a number of individual deductions and credits, including a five-year extension of the American Opportunity Tax Credit.
Estate Tax Provisions:
- A permanent $5 million exemption for individuals dying and gifts made after 2012. The exemption will be adjusted for inflation
- A top estate, gift, and generation-skipping transfer tax rate of 40% (up from 35%).
- Extends portability of the Deceased Spousal Unused Exclusion Amount (DSUEA), effective for individuals dying and gifts made after 2012. The DSUEA allows some or all of the basic exclusion amount not used by a deceased spouse’s estate to be transferred to the surviving spouse, who can use this amount, in addition to his or her own basic exclusion, for lifetime gifts or transfers at death.
Business Tax Provisions:
- Increased Section 179 expensing limitations to $500,000, applied retroactively to 2012. Under prior law the Section 179 expense limit was $139,000 for 2012 and $25,000 for 2013. A Section 179 expense phase-out begins when total assets placed in service during the year exceed $2,000,000.
- Extends 50% bonus depreciation to qualified property placed in service before January 1, 2014 (January 1, 2015 for certain longer lived property and transportation equipment).
- Extension of higher first year depreciation caps for autos and trucks placed in service by December 31, 2013.
- Retroactive extension of 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. The 15 year recover period applies to eligible assets placed in service between January 1, 2012 and December 31, 2013.
- Extension of the Work Opportunity Tax Credit to eligible veterans and non-veterans employed before January 1, 2014.
- The Act extends (and in some cases modifies) many other tax breaks, including the research credit, new markets tax credit, enhanced charitable deduction for contributions of food inventory under IRC Sec. 174(e), basis adjustment to stock of S corporations making charitable contributions of property under IRC Sec. 1367(a) and reduction from 10 to five years in the S corporation built-in gains tax recognition period under IRC Sec. 1374(d)(7).
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