Kevin J. McPherson, The Daily Record Newswire
Congress and the White House waited to the last minute to reach a compromise on legislation that made permanent many of the Bush-era tax cuts that were set to expire on Dec. 31, 2012. This legislation, known as the American Taxpayer Relief Act of 2012, preserves income tax rates for individuals making less than $400,000 and families making less than $450,000, as well as addresses many other tax provisions that were due to expire at the end of the year.
These tax changes, along with others that were introduced in previous legislation, makes 2013 a year of change. Among some of the more significant changes are:
Individual income tax rates
The 10, 15, 25, 28 and 33 percent marginal tax rates remain unchanged as does the 35 percent bracket up to $400,000 (for those filing “single”) and $450,000 (filing “jointly”) of taxable income. Income above these thresholds will now be taxed at 39.6 percent.
Capital gains and dividend rates
The top rate is increased from 15 to 20 percent for those meeting the $400,000 and $450,000 taxable income thresholds. For those whose income falls below these levels, the top rate remains at 15 percent. The zero percent rate will continue to apply for those whose income does not exceed the 15 percent tax bracket (projected to be $36,250 and $72,500 for “single” and “joint” filers, respectively). All qualified dividends will continue to be taxed at the capital gains rates rather than at “ordinary” rates.
Alternative Minimum Tax patch
The AMT patch is made permanent. This recent legislation increases the exemption amount to $50,600 and $78,750 for “single” and “joint” filers in 2012. After 2012, the exemption amounts will be indexed to inflation. It is expected that this permanent patch will protect millions from the dreaded AMT.
Limitation of itemized deductions (Pease limitation)
Beginning in 2013, this legislation revives the limitation on itemized deductions on high-income taxpayers. For those whose income exceeds $250,000 and $300,000 (“single” and “joint” filers respectively), their itemized deductions will be reduced by 3 percent of the income in excess of their applicable threshold, however, the reduction is capped at 80 percent of their itemized deductions.
Certain items, such as medical expenses and investment interest expense, are exempted. Without the passage of this legislation the threshold amounts would have been significantly lower ($178,150 for “joint” filers), further reducing the amount of itemized deductions.
Personal exemption phaseout
This legislation also revives the personal exemption phaseout, but at higher threshold amounts than those that were scheduled to take effect in 2013, after the sunset of the Bush-era tax legislation. Beginning in 2013, the exemption will be reduced by 2 percent for each $2,500 of a taxpayer’s income that exceeds the respective income threshold ($250,000 and $300,000 for “single” and “joint” filers, respectively).
Child tax credit
Absent the American Tax Relief Act of 2012, the child tax credit was due to fall to $500 per qualifying child. This legislation permanently extends the $1,000 credit for those that qualify.
State and local sales tax deduction
This legislation extends through 2013 the option to claim a deduction for state and local sales tax in lieu of state and local income tax.
Education credits and deductions
The American Opportunity Tax Credit has been extended through 2017. Qualifying taxpayers may claim up to a $2,500 credit for qualified tuition and expenses. The higher education tuition deduction has also been extended through 2013 and has been made retroactive to 2012. Qualifying taxpayers may claim an above-the-line deduction of up to $4,000. However, taxpayers cannot claim both of these in the same tax year.
IRA distributions to charity
This legislation extends through 2013 the provision allowing tax-free distributions up to $100,000 per year, from IRAs to charities by taxpayers 70.5 years and older. A special transition rule exists that allows taxpayers to treat IRA distributions made in December 2012 as a charitable distribution made in 2012, if the money is transferred to a charity by Feb. 1, 2013. In addition, taxpayers are allowed to recharacterize distributions made in January 2013 as being made in 2012.
Estate and gift taxes
This legislation provides for a maximum federal estate tax rate of 40 percent with a $5 million exclusion for those dying after Dec. 31, 2012. Portability of a decedent’s unused exclusion amount to their surviving spouse has been made permanent as well. Without this legislation, the maximum tax rate was due to increase to 55 percent with an exclusion amount of only $1 million and no portability.
Capital asset expensing and bonus depreciation
Section 179 small business expensing of capital asset purchases has been increased for 2012 and 2013 to $500,000 with a $2 million investment limit. Without this legislation, the dollar limit would have been $125,000 and $25,000 for 2012 and 2013, respectively. Fifty percent bonus depreciation has been extended through 2013. This allows businesses to expense half of qualifying capital asset purchases without an investment limitation.
In addition to the above changes, the American Taxpayer Relief Act of 2012 extended various other tax provisions such as: marriage penalty relief, deductions for student loan interest and school teacher expenses, the research and development credit, and certain energy credits, among others.
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Kevin J. McPherson, CPA, is a principal with Mengel, Metzger, Barr & Co. LLP. He can be reached at (585) 423-1860 or Kmcpherson@mmb-co.com.
