On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012. The new law is a partial resolution to avert the looming fiscal cliff, and it addresses many tax provisions that were set to expire at the end of 2012. The following is a summary of some of the major provisions included in the Act as they pertain to:
Higher payroll and self-employment taxes on all individuals
The temporary 2% reduction in (i) the employee's share of payroll
taxes withheld from wages, and (ii) the self-employment tax was not extended.
After 2012, income at or below the ceiling amount, which is $113,700 in
2013, is subject to an additional tax of 2%.
As of January 1, 2013, taxable income of individuals above certain threshold amounts will be taxed at a top income tax rate of 39.6%. The threshold amounts are:$400,000 - single filers
After 2013, these dollar amounts will be adjusted for inflation.
After 2012, personal exemptions are reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer's adjusted gross income exceeds the following applicable threshold:
$250,000 - single filers
$275,000 - heads of households
$300,000 - married taxpayers filing jointly and surviving spouses
$150,000 - married taxpayers filing separately
After 2013, these dollar amounts will be adjusted for inflation.
After 2012, itemized deductions are reduced by 3% of the amount by which the taxpayer's adjusted gross income exceeds the personal exemption threshold as stated in the preceding paragraph (adjusted for inflation) - not to exceed 80% of the otherwise allowable itemized deductions.
After 2011, the exemption amount is permanently increased to $50,600 for unmarried taxpayers and $78,750 for married persons filing jointly ($39,375 for married persons filing separately). After 2012, these dollar amounts are adjusted for inflation.
As of January 1, 2013, the top income tax rate imposed on capital gain and dividend income of individuals with taxable income exceeding $400,000 ($450,000 for married taxpayers) is 20% after 2012 (23.8% if the new 3.8% Medicare tax on net investment income also applies). The 0% and 15% rates (and the new Medicare tax) continue to apply for other taxpayers.
The following individual tax breaks are retroactively reinstated for 2012 and extended through 2013:
The following depreciation provisions are retroactively reinstated for 2012 and extended through 2013:
The following business tax breaks are retroactively reinstated for 2012 and extended through 2013:
The new law made permanent the $5 million per person estate, gift and generation skipping tax exemptions, indexed for inflation. Despite fears that the gift tax exemption would be limited to $1 million, Congress permanently unified all three taxes. Although not confirmed by the IRS as yet, the 2013 exemption amount for all three transfer taxes as so indexed will be $5,250,000. The law also increased the top estate and gift tax rate from 35% to 40%. Effectively, a 40% flat tax rate applies on amounts exceeding the exemption amount.
The portability of any unused estate tax exemption from a deceased spouse to his or her surviving spouse was also retained and made permanent. For a complete discussion of portability, see our December 2012 Trusts & Estates Group Update.
The Pension Protection Act of 2006 (PPA) made significant changes, temporarily, to the rules governing charitable contributions. With the passage of the American Taxpayer Relief Act of 2012, several favorable rules have been extended through December 31, 2013.
Funding lifetime charitable giving from IRA assets had traditionally been a bad choice for donors because, among other reasons, the gross income attributable to a withdrawal from an IRA may not have been fully offset by the available charitable contribution deduction. This could result in a taxable event even though the entire amount of the withdrawal was contributed to charity. The PPA provided a charitable giving incentive by granting an annual exclusion from gross income of up to $100,000 for qualified charitable distributions from an IRA, thereby removing the multitude of potential negative tax drawbacks traditionally associated with funding charitable contributions with IRA withdrawals. The new law reinstates this opportunity, which had expired at the end of 2011. It is now revived for 2012 and continues through 2013. Because 2012 has already passed, a special rule permits distributions taken in 2012 to be transferred to charities for a limited period in 2013. Another special rule permits certain distributions made in 2013 as being deemed made on December 31, 2012.
To encourage contributions of real property for conservation purposes, the PPA made several favorable changes to the percentage limitation rules applicable to "qualified conservation contributions" by individuals.
Under the PPA, a limitation of 50% of the donor's contribution base (roughly, adjusted gross income) applies to conservation contributions by individuals. In the case of an individual who is a "qualified farmer or rancher" for the tax year of the contribution, the percentage limitation for qualified conservation contribution is increased to 100% of the donor's contribution base.The deduction for qualified conservation contributions is considered after all other allowable charitable contribution deductions. Thus, current year contributions to all other organizations, and presumably any carryover from a prior year, are deducted before qualified conservation contributions. This ordering regime is particularly favorable because any unused deduction attributable to qualified conservation contributions may be carried over for up to 15 taxable years, rather than the five-year carryover period that applies to all other contributions.
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IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding U.S. tax penalties.