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After much talk about the "fiscal cliff", the American Taxpayer Relief Act of 2012 was passed by the Senate on December 31, and approved by the House on January 1. President Obama signed the bill late last night in Hawaii. Here are some of the highlights:
Individual Income Tax Rates - The Act makes permanent for 2013 and beyond the lower Bush-era income tax rates for all, except for taxpayers with taxable income above $400,000 ($450,000 for married taxpayers, $425,000 for heads of households). Income above these levels will be taxed at a 39.6% rate. Individual marginal rates will remain at 10, 15, 25, 28, 33, and 35, but with an additional 39.6 rate above the threshold amounts.
Dividends and Capital Gains - For taxpayers with the same income thresholds as noted above, the top rate on capital gains and qualified dividends will be 20%. All other taxpayers will continue to be taxed at the maximum rate of 15% (those in the 10% and 15% tax brackets pay a zero percent capital gain rate). Qualified dividends for all taxpayers will continue to be taxed at capital gain rates, rather than ordinary income tax rates.
Permanent AMT Relief - The Act permanently "patches" the AMT for 2012 and subsequent years by increasing the exemption amounts and allowing nonrefundable personal credits to the full amount of the taxpayer's regular tax and AMT. It also provides for an annual inflation adjustment to the exemption amounts for years beginning after 2012.
Pease Limitation - The "Pease" limitation, which reduces a higher income taxpayer's otherwise allowable itemized deduction by 3% of the amount by which the adjusted gross income exceeds an "applicable threshold", is officially restored. However, the "applicable threshold" amounts have been increased to $300,000 for joint filers, $275,000 for heads of households, $250,000 for singles, and $150,000 for married taxpayers filing separately.
Personal Exemption Phase-out - The personal exemption phase-out is also revived with income threshold levels slightly higher than in the past. The levels are the same as the "Pease" limitation levels.
Payroll tax holiday ends -The two-percent cut in the Social Security tax for all earners up to the Social Security wage base ($113,700) will not be extended into 2013.
Benefits Temporarily Extended - Several deduction/credit items have been extended for two years, through 2013. Some of the more common ones are the state and local sales tax deduction, teacher's classroom expense deduction, the above-the-line deduction for qualified tuition and related expenses, mortgage insurance premium deduction, energy credit, and the provision allowing tax-free distributions from IRAs to public charities by those 70 ½ or older (up to $100,000). In addition, the provision to exclude income from cancellation of mortgage debt on a principal residence of up to $2 million is extended through 2013.
Child and Education Credits - The Act permanently extends the $1,000 child tax credit, and the 35% rate for the child and dependent care credit, along with the $3,000 cap on expenses for one qualifying individual and the $6,000 cap for two or more qualifying individuals. The American Opportunity Tax Credit is extended through 2017. The exclusion from income and employment taxes for employer-provided education assistance up to $5,250 is also extended permanently.
Estate and Gift Taxes - The estate tax regime will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples due to portability becoming permanent) but will be applied at a higher 40 percent rate (up from 35 percent in 2012).
Business Tax Provisions - The enhanced code section 179 small business expensing, which allows a business to expense up to $500,000 of equipment purchases, with a $2 million investment limit, is extended through 2013. Fifty percent bonus depreciation is also extended. The research tax credit and work opportunity tax credit are both extended through 2013, as well as several energy tax incentives.
Please contact your C&L tax professional with any questions. | 
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