By Joseph S. Mastaler, Jr., CPA, CGMA and Sean R. O’Connell, CPA/PFS, CGMA
Early in the afternoon on January 1, 2013, the Senate, by an 89 – 8 margin, approved and sent to the House of Representatives, the â€œAmerican Taxpayer Relief Actâ€. Over the remainder of that New Year’s Day, it was not clear that the House would approve the measure. But, late in the evening, by a 257-167 margin, the House passed the bill and sent it to the President who signed it on January 2, 2013.
This act prevents many of the tax increases that were scheduled to go into effect in 2013. It retained many favorable tax breaks that were scheduled to expire on January 1, 2013, and reinstated many tax breaks retroactively to January 1, 2012. But the Act did allow some tax increases to go into place, principally for certain high-income individuals, and it significantly reduced the federal Estate and Gift tax increases that were scheduled to be effective on January 1, 2013.
What follows is a list of what we consider to be some of the major tax provisions added to the law by the Act:
- As of 2013, the top income tax rate increases to 39.6% (up from 35%) for individuals with taxable incomes of over $400,000 ($450,000 for joint filers; $425,000 for heads of household).
- The Alternative Minimum Tax (AMT) was retroactively “patched” for 2012, and the “patch” was made permanent by indexing it for inflation. Retroactively to 2012, the exemption was set at $78,750 for joint filers and $50,600 for single filers. Inflation indexed amounts for 2013 are not yet available.
- For years beginning after 2012, the dividend and capital gain tax rate permanently increases to 20% (up from 15%) for individuals with at least $400,000 ($450,000 for joint returns) of taxable income.
- â€œPEPâ€ and â€œPEASEâ€ limitations apply to high-earners beginning after 2012. The personal exemption phase-out (PEP) and itemized deduction phase-outs (named after Congressman Pease) were reinstated for taxpayers with adjusted gross incomes in excess of $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.
- The estate and gift tax exclusion amount was set to $5 million for 2013, and is indexed for inflation for future years, the top estate and gift tax rate was set to 40% for years beginning after 2012 and portability between spouses of the unused exemption amount was made permanent. Prior to the Act, the exclusion was set to be $1 million for 2013 and thereafter, with no inflation adjustments, the top tax rate was set to be 55%, and portability was to expire.
- Tax-free distributions from individual retirement plans to qualified charities were reinstated for 2012 and 2013, with a special provision allowing for certain January 2013 transfers to charity to count as being contributed in 2012.
- Certain business tax credits, including the research credit and the work opportunity tax credit, and the Section 199 domestic production activities deduction, were generally extended through the end of 2013, retroactively from the beginning of 2012.
- The $500,000 increased expensing business tangible personal property amounts under Section 179 was extended retroactively to 2012 through 2013. Fifty percent first year bonus depreciation was also extended through 2013.
- The fifteen-year straight line cost recovery for qualified leasehold improvements (Section 1250 property), qualified restaurant buildings and improvements and qualified retail improvements (improvements made to the interior portion and used by the general public) were extended through 2013.
- The American Opportunity Tax Credit, a modified earned income tax credit (EITC), and the refundable child tax credit were extended, retroactively, to 2012 through 2017.
- Various energy credits, including the credit for energy-efficient new homes (Section 45L), were retroactively extended to the end of 2013.
Not extended by the Act, and having the effect of a 2% tax increase on wages and self-employment income up to $113,700, is the 2012 payroll tax “holiday” that had reduced the employee share of the OASDI portion of Social Security taxes from 6.2% to 4.2%. Also not addressed by the Act were taxes scheduled to take effect on January 1, 2013, under the Patient Protection and Affordable Care Act (ObamaCare). ObamaCare imposes a 3.8% surtax on net investment income for certain higher income taxpayers. Additionally, ObamaCare imposes a .9% surtax on wages or self-employment income where compensation and self-employment income reported on a joint return exceeds $250,000.
The Act contains many more provisions; we have only highlighted those provisions that we considered to be most important. Our tax consultants are available to discuss how the changes in the tax law will affect your tax and financial future. Please contact your PBMares tax consultant for additional information.