A Summary of the American Taxpayer Relief Act of 2012

 

The Federal Government avoided the Fiscal Cliff...Well, for now any way.

 

At the very last minute they passed the American Taxpayer Relief Act of 2012.  Here are some of the highlights:

 

 Income, Capital Gains and Qualifying Dividends Tax

Married couples filing jointly with income over $450,000 and single filers with income over $400,000 will see their tax bracket increase from 35% to 39.6%. Additionally they will be subject to a long-term capital gains tax and qualifying dividends tax rate of 20%.  Taxpayers with incomes below these amounts will continue to have either the 0% or the 15% rate on capital gains.  They will also continue to pay 15% on qualifying dividends.

 

Estate and Gift Tax

The current federal estate tax exclusion of $5.12 million dollars will continue.  What’s different is that this amount will now be indexed to inflation. Many, although not all, sections of the tax code are indexed to inflation. It is estimated that the exclusion will rise to $5.25 million dollars by applying the inflation index. The tax rate however has gone up from 35% in 2012 to 40% in 2013. This is however lower than the rate of 55% which was scheduled to take effect.

The surviving spouse may use any portion of their deceased spouses’ exclusion that they did not use.  This is the concept of portability which was introduced in 2010.  This legislation makes portability permanent.

 

Phase Out of Itemized Deductions and Exemptions

The higher income earners will also see a phase out of itemized deductions and exemptions.  Married couples filing jointly with income over $300,000 and single filers with incomes over $250,000 will see both their itemized deductions and exemptions reduced.

 

IRA Distributions to Charity

The law extends the provision that allows certain taxpayers to make qualified donations to charity from their IRA through December 31, 2013. Taxpayers over age 70 1/2 are allowed to donate up to $100,000 to a qualified charity from their IRA.  They don’t get a charitable deduction for this. This distribution counts towards the Required Minimum Distribution (“RMD”). However, this donation is not included in income and these assets are removed from their estate.

 

Alternative Minimum Tax Relief

Taxpayers have to calculate their income tax under two methods.  First is under the regular method, then under the Alternative Minimum Tax (“AMT”). Taxpayers then pay the higher of the two taxes. The AMT was never indexed to inflation. Therefore every year more taxpayers were subject to this tax.  This act provides permanent relief from the AMT for many taxpayers.

 

Payroll Tax Cut is Eliminated

For the past few years employees have enjoyed a so-called ‘payroll tax cut’.  Employees were paying 6.2% Social Security tax and 1.45% Medicare tax that was withheld from their pay checks. There was a temporary reduction of the Social Security tax from the 6.2% to 4.2%.  This reduction is now gone and the rate is back to 6.2%.

What do you think of the American Taxpayer Relief Act of 2012?

About the author:

Tom Scanlon, CPA, CFP®

Tom Scanlon has over twenty-five years experience in public accounting with an extensive background in the areas of financial, tax and estate planning.
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