Press Room: Tax Release
Congress Addresses Tax Concerns of Fiscal Cliff; Makes Many Cuts Permanent While Extending Others
The Senate and the House of Representatives finally passed a bill, the American Taxpayer Relief Act of 2012 (Act), to avoid some of the consequences of the fiscal cliff. President Obama has not, as of January 2, signed the bill into law, but he has indicated that he would do so. The Act permanently extends a large number of tax items from the 2001 and 2003 tax acts and other expired tax provisions. The following is a summary of the major tax provisions of the Act.
PROVISIONS AFFECTING INDIVIDUALS
Individual Tax Rates
For tax years beginning after 2012, the individual marginal tax rates under current law are retained (10%, 15%, 25%, 28%, 33% and 35%) but a new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).
Phaseout of Itemized Deductions and Personal Exemptions
The Act reinstates the phaseout of personal exemptions and itemized deductions for single taxpayers with adjusted gross income (AGI) greater than $250,000, for heads of households with AGI greater than $275,000, and for married individuals filing jointly with AGI greater than $300,000 ($150,000 for each married spouse filing separately). The phaseout for personal exemptions is a reduction of 2% for each $2,500 by which the taxpayer’s AGI exceeds the threshold amount. The phaseout of itemized deductions is a reduction of 3% of the amount by which the taxpayer’s AGI exceeds the threshold amount but the reduction shall not exceed 80% of otherwise allowable deductions.
Capital Gains and Dividends
There is a new top tax rate of 20% that applies to capital gains and dividends for individuals subject to the new top income tax bracket. The current 15% rate is retained for taxpayers in the middle brackets (25% to 35%) and a zero rate is retained for taxpayers in the 10% and 15% income tax brackets.
Alternative Minimum Tax
The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. The Act also permanently allows an individual to offset his or her entire regular tax liability and AMT liability by nonrefundable personal credits.
Estate and Gift Tax
The estate and gift tax exclusion amount remains at $5 million indexed for inflation ($5.12 million in 2012). The top tax rate increase from 35% to 40% is effective January 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the Act.
The Act also made permanent various temporary tax provisions. Some of these include:
- Marriage penalty relief (i.e., the increased size of the 15% rate bracket and increased standard deduction for married taxpayers filing jointly);
- The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one);
- The exclusion for employer-provided educational assistance;
- The enhanced rules for student loan deductions;
- The higher contribution amount for Coverdell education savings accounts; and
- The employer-provided child care credit.
Individual Credits Expired at the End of 2012
The American Opportunity Tax Credit for qualified tuition and other expenses of higher education was extended through 2018. Other credits that were extended for the same five-year period include enhanced provisions of the child tax credit and the earned income tax credit.
Individual Provisions Expired at the End of 2011
The Act also extended through 2013 a number of individual tax provisions that expired at the end of 2011:
- Deduction for certain expenses of elementary and secondary school teachers;
- Exclusion from gross income of discharge of qualified principal residence indebtedness;
- Parity for exclusion from income for employer-provided mass transit and parking benefits;
- Mortgage insurance premiums treated as qualified residence interest;
- Deduction of state and local general sales taxes;
- Special rule for contributions of capital gain real property made for conservation purposes;
- Above-the-line deduction for qualified tuition and related expenses; and
- Tax-free distributions from individual retirement plans for charitable purposes.
For transfers made after December 31, 2012, individuals may convert all or a portion of their existing 401(k), 403(b) and 457(b) account balances to a designated Roth account under the same plan even if they have not attained age 59 ½ or have separated from service. Any amount converted will be taxable on the date of conversion.
PROVISIONS AFFECTING BUSINESSES
Business Tax Extenders
The Act extends and modifies many business tax credits and other provisions. Some of these business provisions extended through 2013 include:
- Research credit;
- Employer wage credit for employees who are active duty members of the uniformed services;
- Work opportunity tax credit;
- Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements;
- Enhanced charitable deduction for contributions of food inventory;
- Election to expense mine safety equipment;
- Special expensing rules for certain film and television productions;
- Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico;
- Modification of tax treatment of certain payments to controlling exempt organizations;
- Treatment of certain dividends of regulated investment companies;
- Regulated investment company qualified investment entity treatment under the Foreign Investment in Real Property Act;
- Extension of subpart F exception for active financing income;
- Lookthrough treatment of payments between related controlled foreign corporations under foreign personal holding company rules;
- Temporary exclusion of 100% of gain on certain small business stock;
- Basis adjustment to stock of S corporations making charitable contributions of property;
- Reduction in S corporation recognition period for built-in gains tax; and
- Bonus depreciation.
Energy Tax Extenders
The Act also extends through 2013 a number of energy credits and provisions that expired at the end of 2011:
- Credit for energy-efficient existing homes;
- Credit for alternative fuel vehicle refueling property;
- Credit for two or three-wheeled plug-in electric vehicles;
- Cellulosic biofuel producer credit;
- Incentives for biodiesel and renewable diesel;
- Production credit for Indian coal facilities placed in service before 2009;
- Credits with respect to facilities producing energy from certain renewable resources;
- Credit for energy-efficient new homes;
- Credit for energy-efficient appliances;
- Special allowance for cellulosic biofuel plant property;
- Special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities; and
- Alternative fuels excise tax credits.
The IRS’ authority to apply a withholding tax to gains on the disposition of U.S. real property interests by partnerships, trusts, or estates that are passed through to partners or beneficiaries that are foreign persons is made permanent, and the amount is increased to 20%.