Beyond the Sound Bites: Key Provisions of the “American Taxpayer Relief Act” (Or Fiscal Cliff Safety Line)


by Matt Ottemann

Ottemann, Matthew
mottemann@mcgrathnorth.com
(402) 341-3070

Rightfully so, the comprehensive tax and spending provisions passed by Congress and signed by President Obama (labeled the American Taxpayer Relief Act) to help the nation avoid the fiscal cliff have received a substantial amount of attention. While we won’t attempt to address all parts of the Act here, we thought it may be helpful to our clients and fellow advisers to summarize certain key tax provisions of the Act:

  • The Top Tax Rate Rises To 39.6% For High Income Taxpayers.  For 2013 and later years, a top rate of 39.6% applies for income earned above $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married taxpayers filing separately. The thresholds will be inflation-adjusted for years after 2013.
  • Capital Gain And Dividend Rates Are Up For High Income Taxpayers (To A Total Of 23.8%).  For 2013 and later, the tax rate for capital gains and dividends will permanently rise to 20% for capital gains and dividends earned by taxpayers with incomes above $400,000 ($450,000 for married taxpayers). After adding in the 3.8% “surtax” mandated by the federal government’s comprehensive health care bill, the tax rate for these capital gains and dividends will be 23.8%.
  • Capital Gain And Dividend Rates For Lower Income Taxpayers.  There will be three classes of rates for lower income taxpayers:
  1. For taxpayers whose total taxable income would be in the 10% or 15% tax rates, the tax rate on capital gains and dividends will permanently be 0%.
  2. For taxpayers in the 25% or greater tax brackets, but whose income is $200,000 ($250,000 for married taxpayers or $125,000 for married filing separately) or less, capital gains and dividends will continue to be taxed at 15%.
  3. For taxpayers who make between $200,001 ($250,001 for married taxpayers or $125,001 for married filing separately) and $400,000 ($450,000 for married taxpayers or $200,000 for married filing separately), the tax rate for capital gains and dividends will stay at 15%, but these capital gains and dividends will also be subject to the 3.8% “surtax” mandated by the federal government’s comprehensive health care bill. This will set the total tax rate for these capital gains and dividends at 18.8%.
  • Personal Exemption And Itemized Deduction Phase-Outs Are Back.  For 2013 and later, personal exemption phase-outs and limitations on itemized deductions are back. These will affect taxpayers earning over $300,000 for joint filers and surviving spouses; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married taxpayers filing separately. For itemized deductions, the total amount of allowable itemized deductions is reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds that threshold, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. The thresholds will be inflation-adjusted for years after 2013.
  • A $5 Million Exemption, With A 40% Rate, For Estate, Gift, And GST Taxes.  For 2013 and later, the Act maintains the $5,000,000 exemption (as indexed for inflation) level for estate, gift, and GST taxes. Therefore, in 2013, the exemption amount is projected now to be $5,250,000 after adjusting for inflation. But the rate on transfers above this threshold is increased to 40%. The Act does keep the portability provisions that allow a surviving spouse to use the remaining exemption of the first spouse to die. Because the exemption remains above $5,120,000, the potential for clawback of gifts made in 2011 or 2012 under the $5,000,000 or $5,120,000 exemption amounts should no longer be an issue.
  • Permanent AMT Relief.  Prior to the government’s action, the individual AMT exemption amounts for 2012 were scheduled to be $33,750 for single taxpayers, $45,000 for married taxpayers and surviving spouses, and $22,500 for married persons filing separately. Retroactively effective for 2012, the Act permanently increased these exemption amounts to $50,600 for single taxpayers, $78,750 for married taxpayers and surviving spouses, and $39,375 for married persons filing separately. In addition, for 2013 and later, these exemption amounts were indexed for inflation. Also, for 2012, most nonrefundable personal credits were to be allowed against AMT only to the extent that the taxpayer’s regular income tax liability exceeded his or her tentative minimum tax, determined without regard to the minimum tax foreign tax credit. Retroactively effective for 2012, an individual may offset his or her entire regular tax liability and AMT liability by the nonrefundable personal credits.
  • Popular Credit Extenders.  The Act extends for five years the following credits that were scheduled to expire after 2012:
  1. The American Opportunity Tax Credit, which permits certain taxpayers to claim a credit equal to 100% of the first $2,000 of qualified tuition and related costs, and 25% of the next $2,000, for a maximum tax credit of $2,500 for the first four years of college;
  2.  Eased rules for qualifying for the refundable child credit; and
  3. Several earned income tax credit changes relating to higher credit amounts for  taxpayers with three or more children, and increases in phase-out amounts for surviving spouses, singles, and heads of households.
  • Individual Extenders.  The Act extends the following additional tax preferences for the period indicated:
  1. The deduction for certain expenses of elementary and secondary school teachers is continued through 2013;
  2. The exclusion for discharge of qualified principal residence indebtedness will apply for 2013;
  3. Parity for the exclusions for employer-provided mass transit and parking benefits is now effective for both 2012 and 2013;
  4. The treatment of mortgage insurance premiums as qualified residence interest is now revived for 2012 and 2013;
  5. The option to deduct state and local general sales taxes is effective for both 2012 and 2013;
  6. The above-the-line deduction for qualified tuition and related expenses is effective for both 2012 and 2013;
  7. Tax-free distributions from individual retirement plans for charitable purposes is effective for both 2012 and 2013. Because 2012 was done when this was extended, a special rule permits certain distributions taken in 2012 to be transferred to charities for a limited period in 2013. Another special rule permits certain distributions made in 2013 to be treated as being made on December 31, 2012.
  • Depreciation Rules Extended.  The following depreciation provisions are retroactively extended through 2014:
  1. 15-year straight line cost recovery for qualified restaurant buildings and improvements, qualified leasehold improvements, and qualified retail improvements.
  2. Accelerated depreciation for business property on an Indian reservation.
  3. Maintained the $500,000 expensing limitations and treatment of certain real property (qualified restaurant buildings and improvements, qualified leasehold improvements, and qualified retail improvements) under Code Sec. 179.
  • Bonus Depreciation.  The Act also extends and modifies the 50% bonus depreciation provisions with respect to property placed in service after 2012, in tax years ending after 2012.
  • Business Tax Breaks.  A number of business credits and special tax rules – too many to completely list here – were also extended. Key provisions include:
  1. The Code Sec. 41 research credit was retroactively extended (with certain modifications) for 2012 and 2013.
  2. The Code Sec. 45D new markets tax credit was retroactively extended for 2012 and 2013.
  3. The Code Sec. 45P employer wage credit for employees who are active duty members of the military was retroactively extended for 2012 and 2013.
  4. The Code Sec. 51 work opportunity tax credit was retroactively extended for 2012 and 2013.
  5. The exclusion from a tax-exempt organization’s unrelated business taxable income of rent, interest, royalties, and annuities paid to it from a controlled entity was extended through 2013.
  6. The exclusion of 100% of gain on certain small business stock acquired before January 1, 2014.
  7. A basis adjustment to stock of S corporations making charitable contributions of property in tax years beginning before December 31, 2013.
  8. The reduction in S corporation recognition period for built-in gains tax is extended through 2013, with a 5-year period (rather than a 10-year period).
  • Pension Transfers To Roth Accounts.  For transfers after December 31, 2012, in tax years ending after that date, an applicable retirement plan (including a qualified Roth contribution program) can allow participants to transfer amounts to designated Roth accounts. The transfer will be treated as a taxable qualified rollover contribution under Code Sec. 408A(e).
  • Energy Tax Credits.  Finally, numerous energy credits were also extended, including a Sec. 45 credit with respect to facilities producing energy from certain renewable resources. A facility using wind to produce electricity may be qualified for this credit if the facility is placed in service before 2014.

Feel free to contact a member of the McGrath North Tax Group if you would like to discuss any of these provisions further or review how these provisions may affect you or your clients.

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