After months of wrangling, Congress passed the American Taxpayer Relief Act of 2012 on Jan. 1, 2013, ending months of “Y2K” style handwringing by the media.
The law extends many of the Bush tax cuts for most taxpayers. This article will touch on some of the most important provisions, which apply for tax years 2013 and beyond.
The ATRA makes permanent the Bush-era income tax rates for all except single taxpayers with a taxable income greater than $400,000, heads of household whose income exceeds $425,000, and married taxpayers who file jointly and income greater than $450,000.
For those with taxable income above these thresholds, there will now be a 39.6 percent tax bracket, compared to the previous 35 percent.
Marriage penalty relief provisions related to the standard deduction and tax brackets that were destined to sunset have been extended.
The ATRA raises the top rate for capital gains and qualified (stock) dividends to 20 percent, from the Bush-era maximum of 15 percent. This top rate will apply to the extent that a taxpayer’s income exceeds the new 39.6 percent tax bracket thresholds ($400,000-single filers, $425,000 head of households and $450,000 joint filers).
All other taxpayers will continue to pay tax on qualified dividends and capital gains at a maximum 15 percent rate.
A zero percent rate will continue to apply to capital gains and qualified dividends to the extent that income falls in the 15 per-
cent bracket or lower.
The Alternative Minimum Tax is patched by increasing exemption amounts and providing for an annual inflation adjustment beginning in 2013.
Limitations on itemized deductions and personal exemptions are revived, although they apply at higher income levels than in the past. The thresholds are $300,000 for married filing jointly, $275,000 for heads of households and $150,000, if married but filing separately.
The ATRA institutes a maximum federal estate tax rate of 40 percent, with a $5 million exclusion that will be annually adjusted for inflation.
Equally important, the act makes permanent the portability of exclusions between spouses. This permits a surviving spouse to make a portability election in order to apply a decedent’s unused exclusion to the surviving spouse’s own transfers during life and death.
The child tax credit of $1,000 has been extended permanently for children under 17 years.
The payroll tax holiday whereby employees paid only 4.2 percent of the normal Social Security contribution of 6.2 percent of wages has ended. Originally enacted in December 2010, this had been intended as a temporary measure.
The American Tax Relief Act of 2012 represents the best compromise that could be obtained in today’s political climate.
Most taxpayers will not see their taxes go up and many of the Bush provisions were made permanent.
Category: Tax Tips