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The American Taxpayer Relief Act of 2012
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The "fiscal cliff" has been averted. The 157-page act (it's a great read!) is mostly permanent. Most Americans will pay more tax, however, overall bill was fairly favorable.
As always, our leaders in Washington love to create political drama, as last-minute negotiations averted sending the nation over the "fiscal cliff." Technically, we went over the cliff. However, on January 1, 2013, new retroactive legislation passed by both houses of Congress. The new legislation titled, The American Taxpayer Relief Act of 2012 or ATRA permanently extends a number of major tax provisions and temporarily extends many others. Here's a quick summary.
Payroll Tax
Americans have Social Security and Medicare taxes withheld from their paychecks. Social Security is 6.2% and Medicare tax is 1.45%. After the mortgage meltdown, the Social Security tax was lowered to 4.2%. This expired on 12/31/2012. Anyone that gets a paycheck will immediately see a 2% increase in taxes.
Tax Rates
For most individuals, the legislation permanently extends the lower federal income tax rates. Most taxpayers will continue to pay tax according to the same brackets (10%, 15%, 25%, 28%, 33%, and 35%). A new top federal income tax rate will increase to 39.6% beginning in 2013 for individuals with income that exceeds $400,000 for individuals or $450,000 for married couples filing jointly.
Long-term capital gain and qualifying dividends have been permanently extended as well. If you're in the 10% or 15% marginal income tax bracket, a special 0% rate is still in effect. If you are in the 25%, 28%, 33%, or 35% tax brackets, a 15% flat rate will apply. Beginning in 2013, however, those who pay tax at the higher 39.6% federal income tax rate (individuals with income that exceeds $400,000, or married couples filing jointly with income that exceeds $450,000) will be subject to a maximum flat rate of 20% for long-term capital gain and qualifying dividends.
Alternative Minimum Tax (AMT)
The AMT is essentially a shadow tax system with its own rates and rules. The last temporary AMT "patch" expired at the end of 2011, threatening to dramatically increase the number of individuals subject to the AMT for 2012. The ATRA permanently extends AMT relief, retroactively increasing the AMT exemption amounts for 2012, and providing that the exemption amounts will be indexed for inflation in future years.
Estate Tax
The Act makes permanent the $5 million exemption amounts (indexed for inflation) for the estate tax, the gift tax, and the generation-skipping transfer tax. The top tax rate, however, is increased to 40% (up from 35%) beginning in 2013. The Act permanently extends the "portability" that allows the executor of a deceased individual's estate to transfer any unused exemption amount to the individual's surviving spouse.
Phase-outs or Limitation of Itemized Deductions and Personal Exemptions
The Limitation on Itemized Deductions (known as Pease after the congressman who helped create it) reduces most itemized deductions by 3 percent of the amount by which AGI exceeds a specified threshold, up to a maximum reduction of 80 percent of itemized deductions. Pease had been repealed through 2012. As a result, all taxpayers get the full value of their itemized deductions in 2012. The Pease limitation is now back. The new legislation provides that, beginning in 2013, personal and dependency exemptions will be phased out for those with incomes exceeding specified income thresholds. Similarly, itemized deductions will be limited. For both the personal and dependency exemptions phase-out and the itemized deduction limitation, the threshold is $250,000 for single individuals or $300,000 for married individuals filing joint federal income tax returns.
, those are the quick highlights. The 157-page act had many other curios and temporary extensions affecting tax credits, depreciation rules, Roth conversions of company plans, Charitable IRA distributions, and many more.
Separate from the ATRA, but part of the 2010 healthcare reform law, there is the additional 3.8% surtax on investment income--capital gains and dividend income, meant to help pay for healthcare, which goes into effect in 2013. The tax affects only individuals with more than $200,000 in modified adjusted gross income (MAGI), and married couples filing jointly with more than $250,000 of MAGI.
The American Taxpayer Relief Act is a stop-gap measure to prevent the expiration of the Bush-era tax cuts from falling on middle income taxpayers. Congress must still address sequestration. Congress is likely to revisit tax policy and spending cuts when it tackles the expected increase on the nation's debt limit in February. Stay tuned for more drama!
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, feel free to give us a call if you want to discuss anything further or if we can assist you.
We wish you a prosperous and healthy New Year!
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Bill Harris, CFP®
WH Cornerstone Investments |
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