Tax Law Changes in the American Taxpayer Relief Act

Tax Law Changes in the American Taxpayer Relief Act

Article posted in Legislative on 4 January 2013| comments
audience: National Publication | last updated: 4 January 2013
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Summary

On January 1, 2013, both the Senate and House of Representatives passed H.R.8, the "American Taxpayer Relief Act" and President Obama has now signed it into law. In this article, the Long Beach, California accountancy firm Windes & McClaughry review the key provisions of the Act.

Individual income tax rates

For tax years beginning after 2012, the income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35%, but with a 39.6% rate applying for income above a certain threshold (specifically, income in excess of the “applicable threshold” over the dollar amount at which the 35% bracket begins). The applicable threshold is $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. These dollar amounts are inflation-adjusted for tax years after 2013.

PEP limitations to apply to “high-earners”

For tax years beginning after 2012, the Personal Exemption Phaseout (PEP), which had previously been suspended, is reinstated with a starting threshold for those making $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Under the phaseout, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer's adjusted gross income (AGI) exceeds the applicable threshold. These dollar amounts are inflation-adjusted for tax years after 2013.

Pease limitations to apply to “high-earners”

For tax years beginning after 2012, the “Pease” limitation on itemized deductions, which had previously been suspended, is reinstated with a starting threshold for those making $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Therefore, for taxpayers subject to the “Pease” limitation, the total amount of their itemized deductions is reduced by 3% of the amount by which their AGI exceed the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. These dollar amounts are inflation-adjusted for tax years after 2013.

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 permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpay- ers). After including 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 permanently 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 subject to the surtax.

Transfer tax provisions kept intact with slight rate increase

The Act prevents steep increases in estate, gift and generation-skipping transfer (GST) tax that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation). However, the Act also permanently increases the top estate and gift tax 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.

Permanent AMT relief

The Act provides permanent alternative minimum tax (AMT) relief. The AMT is the excess of the tentative minimum tax for the year over the regular tax for the year. In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount (which phases out at higher income levels). The result is alternative minimum taxable income (AMTI), which is subject to an AMT rate of 26% or 28%. Prior to the Act, the individual AMT exemption amounts for 2012 were to have been $33,750 for unmarried taxpayers; $45,000 for joint filers; and $22,500 for married persons filing separately. Retroactively effective for tax years beginning after 2011, the Act permanently increases these exemption amounts to $50,600 for unmarried taxpayers; $78,750 for joint filers; and $39,375 for married persons filing separately. In addition, for tax years beginning after 2012, it indexes these exemption amounts for inflation.

Extenders

The Act extends:

  • the American Opportunity Tax Credit, which permits eligible taxpayers to claim a credit equal to 100% of the first $2,000 of qualified tuition and related expenses, and 25% of the next $2,000 of qualified tuition and related expenses (for a maximum tax credit of $2,500 for the first four years of post-secondary education);
  • the treatment of mortgage insurance premiums as qualified residence interest, which expired at the end of 2011 and which is now revived for 2012 and continued through 2013;
  • the option to deduct state and local general sales taxes, which expired at the end of 2011 and which is now revived for 2012 and continued through 2013;
  • the above-the-line deduction for qualified tuition and related expenses, which expired at the end of 2011 and which is now revived for 2012 and continued through 2013;
  • tax-free distributions from individual retirement plans for charitable purposes, which expired at the end of 2011 and which is now revived for 2012 and continued through 2013. Because 2012 has already passed, a special rule permits distributions taken in 2012 to be transferred to charities for a limited period in 2013. Another special rule permits certain distributions made in 2013 as being deemed made on December 31, 2012; and
  • nonbusiness energy property credit for energy-efficient existing homes is retroactive- ly 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).

Depreciation provisions modified and extended

The following depreciation provisions are retroactively extended by the Act through 2013:

  • 50% federal bonus depreciation;
  • 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements;
  • $500,000 of increased expensing limitations and treatment of certain real property as Code Section 179 property.

Business tax breaks 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 new markets tax credit is retroactively extended for two years through 2013.
  • The work opportunity tax credit is retroactively extended for two years through 2013.
  • Exclusion of 100% of gain on certain small business stock acquired before January 1, 2014.

For more information about the tax changes included in the American Taxpayer Relief Act, please contact us at taxalerts@windes.com or any of our tax professionals at (562) 435-1191, (949) 271-2600, (310) 316-8130, or (213) 239-9745.

To view our quarterly newsletter, SOLUTIONS, please visit our website at www.windes.com.


Windes & McClaughry is a recognized leader in the field of accounting, assurance, tax, and business consulting services. Our goal is to exceed your expectations by providing timely, high-quality, and personalized service that is directed at improving your bottom-line results. Quality and value-added solutions from your accounting firm are essential steps toward success in today’s marketplace. You can depend on Windes & McClaughry to deliver exceptional client service in each engagement. For over eighty-five years, we have gone beyond traditional services to provide proactive solutions and the highest level of capabilities and experience.

Windes & McClaughry’s team approach allows you to benefit from a wealth of technical expertise and extensive resources. We service a broad range of clients, from high-net-worth individuals and nonprofit organizations to privately held businesses and publicly traded companies. We act as business advisors, working with you to set strategies, maximize efficiencies, minimize taxes, and take your business to the next level.

Headquarters

111 West Ocean Boulevard Twenty-Second Floor
Long Beach, CA 90802
Tel: (562) 435-1191

Orange County Office

18201 Von Karman Avenue Suite 1060
Irvine, CA 92612
Tel: (949) 271-2600

Los Angeles Office

601 South Figueroa Street Suite 4950
Los Angeles, CA 90017
Tel: (213) 239-9745

South Bay Office

21515 Hawthorne Boulevard Suite 840
Torrance, CA 90503
Tel: (949) 271-2600
Tel: (310) 316-8130

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