On January 2, 2013 President Obama signed into law the American Taxpayer Relief Act of 2012 (the Act). The Act includes a number of personal and business tax provision which we have highlighted here. Please contact a member of your DGC service team if you would like to discuss the Act and how it may impact your tax situation.
Personal Tax Provisions
Individual Income Tax Rates – A new 39.6% rate applies for taxable income above $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. For individuals below these levels the graduated income tax rates that had been in place will stay at 10%, 15%, 25%, 28%, 33% and 35%.
Long Term Capital Gain and Dividend Rates – The top rate for long term capital gains and dividends permanently rises to 20% is applicable to taxpayer’s subject to the 39.6% tax rate. The previous 15% tax rate applicable to long term gains and dividends will continue to be applicable to taxpayers below the above thresholds.
AMT Relief – Effective for tax year 2012 and subsequent years the exemptions applicable to AMT have been permanently “patched” and indexed for inflation. The exemptions for 2012 are $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately.
We will continue to watch and see if Congress tackles more comprehensive AMT tax reform as part of debt ceiling or spending cut negotiations.
IRA Distributions to Charity (applicable to 2012 and 2013) – The Act extends for two years, through December 31, 2013, the provision allowing tax-free distributions from IRAs to public charities, by individuals 701/2 or older, up to a maximum of $100,000 per taxpayer per year.
The Act provides special transition rules. One rule allows taxpayers to recharacterize distributions made in January 2013 as made on December 31, 2012. The other rule permits taxpayers to treat a distribution from the IRA to the taxpayer made in December 2012 as a charitable distribution, if transferred to charity before February 1, 2013.
Personal Exemption Phaseout (PEP) – The Personal Exemption Phaseout has been reinstated. 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 taxpayer’s adjusted gross income exceeds $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.
Pease Limitation – The “Pease“ limitation on itemized deductions is reinstated with starting thresholds that are the same as the PEP. If applicable, the total amount of a taxpayer’s 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.
Estate and Gift Tax – The Act permanently increases the top estate, gift and generation-skipping-transfer (GST) rate from 35% to 40% for individuals dying and gifts made after 2012. The estate and lifetime gift exemption will be permanently kept at $5,000,000 (indexed for inflation).
The Act also makes “portability” permanent between spouses. Portability allows the estate of a decedent who is survived by a spouse to make a portability election to permit the surviving spouse to apply the decedent’s unused exclusion to the surviving spouse’s own transfers during life and at death.
Tax Credits – A host of individual tax credits and deductions have been made permanent or extended, including:
Code Sec. 179 Small Business Expensing – The Sec. 179 dollar limit for 2012 and 2013 is $500,000 with a $2 million investment limit. The rule allowing off-the-shelf computer software is also extended.
Bonus Depreciation – The 50% bonus depreciation deduction has been extended through 2013. Some transportation and longer production property is eligible for 50% bonus depreciation through 2014.
First-year Depreciation Cap for 2013 Autos and Trucks – Passengers autos that are considered “qualified property” may qualify for an additional $8,000 bonus depreciation deduction if placed in service by December 31, 2013.
Qualified Leasehold/Retail Improvements, Restaurant Property – The Act extends through 2013 the 15-year recovery period for qualified leasehold improvements, qualified retail improvements, and qualified restaurant property.
S Corporation Built-In Gains Tax – In determining the net recognized built-in gain of an S Corporation for tax years 2012 and 2013, the recognition period remains at 5 years. This had been scheduled to transition back to 10 years.
Research tax Credit – The credit has been extended through 2013. the credit may be claimed for increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research.
Work Opportunity Tax Credit (WOTC) – The Act extends through 2013 the WOTC, which rewards employers that hire individuals from targeted groups with a tax credit. The credit is generally equal to 40% of first-year wages up to $6,000.
More Business Tax Extenders – A host of other business tax extenders have been extended through 2013, including:
Please contact a member of your DGC service team if you would like to discuss the Act and how it may impact your tax situation.
Information contained in this article/post was current as of January 4, 2013.