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Highlights of the American Taxpayer Relief Act of 2012

The American Taxpayer Relief Act of 2012 (Act), signed by the President on January 2, 2013, prevents many of the tax increases that were scheduled to go into effect this year and retains many tax deductions and credits that were scheduled to expire. However, it also increases income taxes for some high-income individuals and slightly increases transfer tax rates.

Highlights of the Act include the following:

Tax rates. Income tax rates for most individuals will stay at the same levels as 2012. However, a 39.6% rate will now apply for individuals with taxable incomes above $400,000 ($450,000 married filing jointly).

Capital gain and dividend rates rise for higher income taxpayers. For tax years beginning after 2012, the top rate for capital gains and dividends will rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 married filing jointly). When combined with the 3.8% surtax on investment-type income and gains for tax years beginning after 2012, the overall rate for higher-income taxpayers will be 23.8%.

For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will be subject to a 0% rate. Taxpayers who are subject to a 25% or greater rate on ordinary income, but whose income levels fall below the $400,000/$450,000 thresholds, will continue to be subject to a 15% rate on capital gains and dividends. The rate will be 18.8% for those who are subject to the 3.8% surtax (i.e, those with modified adjusted gross income over $250,000 for joint filers and $200,000 for single filers).

Limitations on deductions. For years beginning in 2013, itemized deductions and personal exemptions will be phased out for married taxpayers with incomes over $300,000 ($250,000 for single filers).

AMT relief. The Act provides alternative minimum tax (AMT) relief. Retroactively effective for tax years beginning with 2012, the Act increases the AMT exemption amounts to $50,600 for single taxpayers and $78,750 for joint filers. Also, the Act allows taxpayers to offset their entire regular tax liability and AMT liability by their nonrefundable personal credits.

Gift and estate taxes. The Act keeps the exemption level at $5,000,000 (indexed for inflation). However, it also increases the top estate and gift rate from 35% to 40%. The Act also continues the portability feature that allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse. All changes are effective for individuals dying and gifts made after 2012.

Individual deductions and credits. The Act extended the following deductions and credits for individuals:

  • The American Opportunity tax credit for qualified tuition and related expenses.
  • The deduction for certain expenses of elementary and secondary school teachers.
  • The exclusion for discharge of qualified principal residence indebtedness.
  • The treatment of mortgage insurance premiums as qualified residence interest.
  • The option to deduct State and local general sales taxes.
  • The special rule for contributions of capital gain real property made for conservation purposes.
  • The above-the-line deduction for qualified tuition and related expenses.
  • Tax-free distributions from individual retirement plans for charitable purposes were retroactively reinstated for 2012 and extended through 2013. Because 2012 has already passed, a special rule permits distributions taken in 2012 to be transferred to charities by January 31, 2013. Another special rule permits taxpayers to elect to have a distribution made in January of 2013 be treated as if it were made on December 31, 2012.

Depreciation provisions modified and extended. The following depreciation provisions are retroactively extended by the Act through 2014:

  • 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
  • Increased expensing limitation of $500,000 and treatment of certain real property as Code Sec. 179 property.
  • The Act also extends and modifies the 50% bonus depreciation provisions for one year so that it applies to qualified property placed in service before 2014.

Business credits extended. The following business credits and special rules are also extended:

  • The research credit is modified and retroactively extended for two years through 2013.
  • The temporary minimum low-income tax credit rate for non-federally subsidized new buildings is extended to apply to housing credit dollar amount allocations made before January 1, 2014.
  • The employer wage credit for employees who are active duty members of the uniformed services is retroactively extended for two years through 2013.
  • The work opportunity tax credit is retroactively extended for two years through 2013.
  • The reduction in S corporation recognition period for built-in gains tax is extended through 2013, with a 5-year period instead of a 10-year period.

Energy-related credits extended. Various energy credits are retroactively extended for two years through 2013. These include:

  • The non-business energy property credit for energy-efficient existing homes. 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 allows taxpayers to claim a 30% credit for qualified alternative fuel vehicle refueling property placed in service through 2013, limited to $30,000 for business use property and $1,000 for personal use property.
  • The credit for biodiesel and renewable diesel.
  • The credit for energy-efficient new homes.
  • The credit for energy-efficient appliances.

Pension provision. For transfers after December 31, 2012, in tax years ending after that date, plan provisions in an applicable retirement plan (which includes a qualified Roth contribution program) can allow participants to elect to transfer amounts to designated Roth accounts with the transfer being treated as a taxable qualified rollover contribution.

Expiration of payroll tax holiday. The payroll tax holiday which decreased the social security portion of the employee payroll tax by 2% was not extended with this Act. Effective January 1, 2013, the rate is 6.2% for both the employer and employee portions.

If you have any questions or concerns on how the American Taxpayer Relief Act of 2012 will affect you, contact your AHP tax advisor at 888.754.8478.

IRS Circular 230 Disclosure – As required by IRS rules, although this written communication may address certain tax issues, the issuer of this document did not intend nor write the advice to be used to avoid any penalty imposed by a taxing authority, nor may the user/recipient of this document use this document’s written tax advice for that purpose. Nor may it be used to promote, market or recommend to another party any transaction or matter addressed herein.

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