Fiscal Cliff Deal: Tax Provisions in the American Taxpayer Relief Act

After an intense weekend of negotiations between Congress and the Obama administration, the American Taxpayer Relief Act (the Act) was approved by Congress on January 1.  We have outlined below some of the Act’s important tax changes that may affect you.

Individual Tax Provisions

Tax Rates.  For years beginning after 2012, the individual tax rates will stay at 10%, 15%, 25%, 28% 33% and 35%, but with a 39.6% rate applying for income over $450,000 for joint files; $425,000 for heads of households; $400,000 for single filers; and $225,000 for married taxpayers filing separately.  After 2013, the amounts are adjusted for inflation.

Employee Payroll Tax Relief.  The two percentage point reduction in payroll taxes for Old Age, Survivors and Disability Insurance (OASDI), commonly known as the Social Security Tax will be allowed to expire and will not be in effect in 2013 and later years.

Capital Gains and Dividend Rates.  The top rate for capital gains and qualifying dividends will permanently rise to 20% for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers).  When combined with the new 3.8% Medicare surtax on investment income already scheduled to be effective for 2013 and later years, the overall tax rate for higher income taxpayers will be 23.8%.

Permanent AMT Relief.  Retroactive to the beginning of 2012, the Act increases the Alternative Tax Exemption amounts to $50,600 for unmarried taxpayers, $78,500 for joint filers and $39,375 for married persons filing separately.  These amounts are indexed for inflation in subsequent years.  The exemption amounts are phased out for higher income taxpayers.

Estate & Gift Tax.  The act permanently increases the estate, gift and generation-skipping-transfer (GST) rate from 35% to 40% for individuals dying after 2012.  The  exemption level will be permanently kept at $5,000,000 and will be indexed for inflation.

Personal Exemption Limitations.  The personal exemption phaseout, which had previously been suspended, is reinstated by the Act after 2012 for taxpayers with income over $300,000 for joint filers and surviving spouses;  $275,000 for heads of household; $250,000 for single filers; and $150,000 for married taxpayers filing separately.  The total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 by which the taxpayers AGI exceeds the applicable threshold.

Itemized Deduction Limitation.  The limitation on itemized deductions, which had previously been suspended, is reinstated for taxpayers with income thresholds the same as those outlined above for the limitation on personal exemptions.  Itemized deductions are reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceed the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions.

Pension Provisions.   The Act provides that plan provisions in a applicable retirement plan can allow participants to elect to transfer amounts to designated Roth accounts with the transfer being treated as a taxable qualified rollover contribution.

Business Tax Provisions and Extenders

Business Tax Extenders.  The Act extended many business tax credits and other provisions.  Among the more notable business tax extensions are:

  • An extension of the 50% first year bonus depreciation provisions by one year for property placed in service before January 1, 2014.  
  • Reinstatement, extension and modification of the Code Sec. 41 research and development tax credit through 2013.   
  • Extension through 2013 of the increased expensing limits under Sec. 179. 
  • Extension of the new markets tax credit through 2013 
  • Reinstatement and extension  through 2013 of the enhanced charitable deduction for contributions of food inventory under Sec. 174(e) 

Other Extenders.  Some of other tax provisions extended by the act include the following:

  • Deduction of state and local general sales tax
  • Mortgage insurance premiums treated as qualified residence interest
  • Deduction for certain expenses of elementary school teachers
  • Exclusion from gross income of discharge of qualified principal residence indebtedness
  • Tax-free distributions from individual retirement plans for charitable purposes

There are many other tax provisions included in the Act.  If you would like to know more about how the changes affect you, your family or your business, please contact one of our tax professionals at Crosslin at 615-320-5500, or at the email addresses listed below.

Rodney Brower

Richard Winstead