As the United States was leaning over the edge of the "Fiscal Cliff", the Senate and the House passed the American Taxpayer Relief Act of 2012 (H.R. 8) on January 1, 2013, with President Obama signing the legislation into law on January 2, 2013. The Act permanently extends many of the so-called Bush tax cuts from 2001 and 2003, while delivering upon President Obama's campaign promises to raise taxes on the upper income taxpayers, albeit at a higher income level than what he campaigned. By passing the legislation, almost 98% of Americans will not see their taxes increase this year. Below is a summary of the key tax provisions of the Act.

Individual Provisions

Tax rates - the Act maintains the lower tax brackets for all taxpayers and adds a 39.6% bracket for the following filers:

• Married filing jointly (and surviving spouses) with taxable income in excess of $450,000,
• Single filers with taxable income in excess of $400,000,
• Head of household filers with taxable income in excess of $425,000, and
• Married filing separately filers with taxable income in excess of $225,000.

The above amounts will be indexed for inflation in the future.

Phase out of itemized deductions - for taxpayers with adjusted gross income in excess of certain thresholds, a phase out of itemized deductions was to go into effect for 2013. The Act raised the adjusted gross income thresholds, before the 3% reduction begins, to the following:

• Married filing jointly (and surviving spouses) with adjusted gross income in excess of $300,000,
• Single filers with adjusted gross income in excess of $250,000,
• Head of household filers with adjusted gross income in excess of $275,000, and
• Married filing separately filers with adjusted gross income in excess of $150,000.

The above amounts will be indexed for inflation in the future.

Phase out of personal exemptions - for taxpayers with adjusted gross income in excess of certain thresholds, a phase out of personal exemptions was to go into effect for 2013. The Act raised the adjusted gross income thresholds as follows:

• Married filing jointly (and surviving spouses) with adjusted gross income in excess of $300,000,
• Single filers with adjusted gross income in excess of $250,000,
• Head of household filers with adjusted gross income in excess of $275,000, and
• Married filing separately filers with adjusted gross income in excess of $150,000.

The above amounts will be indexed for inflation in the future.

Marriage penalty relief - the following marriage penalty relief provisions enacted in 2001 were extended by the Act:

• The standard deduction of a joint filer will be double that of a single filer
• The 15% tax bracket for a joint filer will be double that of a single filer

Estate and gift - the Act extended all provisions of the 2012 estate and gift tax laws with the exception of increasing the applicable tax rate. Therefore, the estate exemption remains at $5,120,000, the lifetime gifting exemption amount remains at $5,120,000, portability of the unused exemption, etc. remains in effect for 2013 and into the future. The Act adds three additional tax brackets to the gift and estate tax brackets with the top tax bracket being 40%. The tax is computed prior to the estate tax exemption of $5,120,000, therefore individuals with a taxable estate will pay a flat 40% tax.

Capital gain and dividend rates - the Act maintains the 15% income tax rate on long term capital gains and qualified dividends for all taxpayers but also provides for a maximum 20% income tax rate on long term capital gains and qualified dividends for the following filers:

• Married filing jointly (and surviving spouses) with taxable income in excess of $450,000,
• Single filers with taxable income in excess of $400,000,
• Head of household filers with taxable income in excess of $425,000, and
• Married filing separately filers with taxable income in excess of $225,000.

Note: The 3.8% surtax takes effect on dividends and certain capital gains beginning in 2013 for those joint filers in excess of $250,000 ($200,000 for single filers).

The above amounts will be indexed for inflation in the future.

Credits - the Act also permanently extends the 2001 changes to the following credits:

• Child tax credit - provides up to a $1,000 credit for each qualifying child,
• Adoption credit - increasing the maximum amount of the credit to $10,000, and
• Child and dependent care credit - allows up to 35% of eligible expenses to be taken as a credit.             

American Opportunity tax credit - the Act extends for five years (through 2017) the American Opportunity Tax Credit, which provides a maximum $2,500 credit on qualified tuition.

Alternative Minimum Tax (AMT) relief - the Act permanently increases the exemption amounts, thus reducing the number of people that would potentially be subject to AMT. The exemptions are increased as follows:

• Married filing jointly - $78,750
• Unmarried taxpayers - $50,600
• Married filing separately - $39,375

The above amounts will be indexed for inflation in the future.

Utilization of non-refundable credits - retroactively to 2012, the Act extends the listing of non-refundable credits to offset both regular and AMT tax. The expanded list of non-refundable credits that can offset both regular and AMT include:

• The child and dependent care credit;
• The elderly and disabled credit;
• The Lifetime Learning tax credit;
• The nonbusiness energy property credit for energy efficient improvements to a principal residence; and
• The credit for interest on certain home mortgages of low income persons.

Education incentives - the Act permanently extends the following education incentives that were passed in 2001 and set to expire:

• Allowance of the student loan interest deduction beyond 60 months, with an increased phase out range
• Increased contribution level ($2,000) to a Coverdell Education Savings Account
• $5,250 exclusion for employer-provided education assistance, including graduate level education

Gain on small business stock - Section 1202 allows an exclusion from income for a percentage of the gain on the sale of qualified small business stock. For taxpayers to be eligible for a 100% exclusion of the gain, the Act retroactively extends the period of acquisition of the qualified small business stock from 2012 through 2013.

Other Individual extensions - the Act also temporarily extends a number of other individual provisions such as:

• Teacher expenses - the Act retroactively extends for 2012 and 2013 the deduction allowed for expenses incurred by elementary and secondary school teachers.
• Debt discharge of qualified principal residence indebtedness - the Act extends this provision through the end of 2013.
• Sales tax - the Act retroactively extends for 2012 and 2013 the option for individuals who itemize their deductions to deduct sales tax in lieu of state income taxes.
• Qualified tuition - the Act retroactively extends to 2012 and through 2013 the availability of an above the line deduction for qualified tuition and related expenses.
• Charitable Individual Retirement Account distributions - the Act retroactively extends to 2012 and through 2013 the ability for taxpayers who are 70 � or older to make tax-free distributions from an IRA to a qualifying charity of up to $100,000. Because this is a retroactive extension, the Act also provides for two special rules that may impact 2012:
  • A taxpayer may take an otherwise qualifying distribution after December 31, 2012 and before February 1, 2013, and elect to have it treated as a 2012 distribution, and
  • For any distribution taken after November 30, 2012 and before January 1, 2013, if the taxpayer transfers funds to a qualifying charity before February 1, 2013, the 2012 distribution will be treated as meeting the requirements and be tax free.
• Mass transit fringe - the Act retroactively extends for 2012 and through 2013 the parity for the amount of a tax-free fringe benefit between mass transit and qualified parking.
• Mortgage insurance premiums - the Act retroactively extends for 2012 and through 2013 the deductibility of mortgage insurance premiums as qualified residence interest.
• Qualified conservation contributions - the Act retroactively extends for 2012 and through 2013 the special increased contribution limits on contributions of qualified conservation real property.

Business Provisions

Depreciation - the Act extends various depreciation provisions as follows:

• Section 179 accelerated depreciation - the Act retroactively increases the amount of immediate expense deduction for eligible assets to $500,000 for taxable years beginning in 2012 (from $125,000) and also increases the amount for taxable years beginning in 2013 to $500,000 (from $25,000). After 2013, the amount of immediate expense deduction will decrease to $25,000.
• Bonus depreciation - the Act extends the applicability of 50% bonus depreciation to assets acquired and placed in service prior to January 1, 2014. In addition, the Act extends for one year (through 2013) the election to forgo bonus depreciation in lieu of accelerating AMT credits against AMT.
• Qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements - the 15 year depreciation preferential treatment to the forgoing assets retroactively remains in place for 2012 and for 2013. Due to this change, these items will also qualify for bonus depreciation.
• Motorsports entertainment complexes - the seven year recovery period for motorsports entertainment complexes were retroactively reinstated for 2012 and through 2013.
• Film and television production costs - the Act retroactively extends for 2012 and through 2013 the immediate expensing of eligible film and television production costs.

Research and development - the research and development credit was retroactively extended to 2012 and through December 31, 2013.

Other credits - The following credits were retroactively extended for two years through 2013:

• New Markets Tax Credit
• Indian Employment Tax Credit
• Railroad Track Maintenance Credit
• Mine Rescue Team Training Credit
• Employer Wage Credit for employees who are active duty members of the uniformed services
• Work Opportunity Tax Credit

S Corporation built in gain - the holding period for recognition of built in gains related to conversions from C Corp to S Corporation status was reduced from 10 to 5 years for taxable years beginning in 2012 and 2013. For taxable years beginning in 2014 and thereafter, the built in gain holding period will revert back to 10 years.

S Corporation contribution of appreciated property to a qualified charity - the shareholders basis in the stock of an S Corporation shall only be reduced by the adjusted basis of the property contributed instead of the fair market value of the property. This provision was extended for two years through 2013.

Energy Related Provisions

The Act also extends a number of energy related provisions such as:

• The nonbusiness energy property credit for energy-efficient existing homes is retroactively extended for two years through 2013. A taxpayer can claim a 10% credit on the cost of: (1) qualified energy efficiency improvements, and (2) residential energy property expenditures with a lifetime credit limit of $500 ($200 for windows and skylights).
• The alternative fuel vehicle refueling property credit is retroactively extended for two years through 2013 so that taxpayers can claim a 30% credit for qualified alternative fuel vehicle refueling property placed in service through December 31, 2013, subject to the $30,000 and $1,000 thresholds.
• The credit for two-wheeled or three-wheeled plug-in electric vehicles is modified and retroactively extended for two years through 2013.
• The cellulosic biofuel producer credit is modified and extended one year through 2013.
• The credit for biodiesel and renewable diesel is retroactively extended for two years through 2013.
• The production credit for Indian coal facilities placed in service before 2009 is extended one year through 2013.
• The credits with respect to facilities producing energy from certain renewable resources is modified and extended one year through 2013. A facility using wind to produce electricity will be a qualified facility if it is placed in service before 2014.
• The credit for energy-efficient new homes is retroactively extended for two years through 2013.
• The credit for energy-efficient appliances is retroactively extended for two years through 2013.
• The additional depreciation deduction allowance for cellulosic biofuel plant property is modified and extended one year through 2013.
• The special rule for sales or dispositions to implement Federal Energy Regulatory Commission (FERC) or State electric restructuring policy for qualified electric utilities is retroactively extended for two years through 2013.
• The alternative fuels excise tax credits for sales or use of alternative fuels or alternative fuel mixtures is retroactively extended for two years through 2013.

Qualified Plan Provisions

Pursuant to the Act, for any qualified plan that has a qualified ROTH program, the plan may allow an individual to transfer an amount not designated as a ROTH account to a ROTH account. The individual will be taxed on the amount of the transfer. Previously, an individual had to take a distribution from the plan and roll the amount into a ROTH IRA. This now allows individuals to "roll over" amounts within the qualified plan.

If you have any questions related to the American Taxpayer Relief Act of 2012 please contact your professional at UHY LLP in Farmington Hills 248 355 1040 or Sterling Heights 586 254 1040, or visit us on the Web at uhy-us.com.

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