American Taxpayer Relief Act of 2012 (1-LR. 8, January l, 2013).
The President signed legislation that
was passed by Congress on January 1, 2013, extending and implementing many changes to law that dates
back to EGTRRA signed by President Bush in 2001, with higher income tax brackets for all taxpayers,
loss of some favorable business tax items, and much lower exemptions for estate and gift tax purposes.
Unlike the 2001 and 2003 legislative acts which were passed on budget reconciliations, most everything
in the new bill is permanent (excluding some traditional extender items) and not subject to a sunset
provision on a 10 year budget window. Some highlights of the legislation:
Tax Provisions in Health Care Law Now Effective.
- The highest individual income tax bracket has been increased from 35% to 39.6% for individuals
over $400,000 of income ($450,000 married).
- The tax rate on long term capital gains and qualified dividends has increased from 15% to 20% I
for those same high-income taxpayers.
- The exemption from alternate minimum tax has been permanently increased, and is no longer I
subject to an annual legislative patch. This is a huge change to prevent middle and upper income
taxpayers from losing itemized deductions and preference items and paying a ﬂat 28% rate.
- However, personal exemptions and itemized deductions are now phased out for taxpayers over
$250,000 ofincome ($3 00,000 married).
- The FICA payroll tax reverts from 4.2% to 6.2% on the employee portion.
- The combined effects of the above, when combined with the new 3.8% surtax mentioned below,
are that high income earners can see marginal income tax brackets exceeding 45%.
- The IRS to charity rollover, which had expired for 2012, has been reinstated through 2013.
While the general rule of requiring a direct transfer from IRA to charity would be fairly useless
for 2012 when it was not passed until 2013, there are special transition rules that will allow for
cash payments by January 31 to charity to qualify as 2012 “qualiﬁed charity distributions”.
- The estate, gift and GST exemption level has been made permanent at $5 million, and is indexed
for inflation. There are no more sunset provisions on this law. With the indexing, the 2013
lifetime exemption is already inflated to $5,250,000.
- Section 179 expensing of capital purchases has been extended at the $500,000 cap. Without
legislation it would have reverted back to a $25,000 annual limit.
- The R&D credit has been extended through 2012 and 2013.
- There are other provisions affecting business as well with respect to bonus depreciation,
depreciation lives, and exclusion of gain on certain small business stock.
Under the “Uneamed lncome Medicare
Contribution" provisions of Affordable Health Care Act passed in 2010, Code Section 1411 is now in
effect. The 3.8% siutax on net investment income applies to individuals, estates and trusts for tax years
beginning after January 1, 2013. The tax is imposed on net investment income of taxpayers who have
over $200,000 of modiﬁed adjusted gross income ($250,000 married), but for estates and trusts, it applies
starting at the highest marginal rate, about $12,000 of net income. Note also that the health care
legislation imposes an increase from 1.45% to 2.35% on the Medicare portion of the payroll tax.