After hotly debated year-end negotiations, the U.S. Senate and House of Representatives passed H.R. 8, the American Taxpayer Relief Act of 2012, on January 1, 2013. On January 2, 2013, President Obama signed the bill into law, which avoids many of the dreaded consequences of the so-called "fiscal cliff." Highlights of the new law include:
- Retaining 2012 marginal rates of up to 35 percent on taxable income below $400,000 for single individuals and $450,000 for married joint filers.
- Setting the top rate at 39.6 percent on taxable income over $400,000 for individuals and $450,000 for married joint filers.
- Tax on qualifying dividends and capital gains at a 20-percent rate for individuals with income over $400,000 and married couples with income over $450,000. The 15-percent rate would remain in effect with income below these thresholds.1
- Imposing limitations on personal exemptions and itemized
deductions for taxpayers meeting the following thresholds:
individuals whose adjusted gross income (AGI) is more than $250,000
and married joint filers whose AGI is more than $300,000.
- Under the Personal Exemption Phaseout provisions of the new law, the total amount of exemptions that can be claimed by a taxpayer is reduced by 2 percent for each $2,500 by which the taxpayer's AGI exceeds the threshold.
- Under the Pease limitation provisions of the new law, the total amount of itemized deductions is reduced by 3 percent of the amount by which the taxpayer's AGI exceeds the threshold. The reduction may not exceed 80 percent of otherwise allowable itemized deductions.
- Estate Tax Provisions:
- Maximum estate tax rate on estates over $1 million is permanently set at 40 percent;
- 2012's individual gift and estate exemption amount of $5.12 million, indexed for inflation, is preserved, along with the exemption's portability provisions.
- Alternative Minimum Tax (AMT) Provisions:
- Retroactively effective for tax years beginning after January 1, 2011, the new law permanently increases the exemption amount used to calculate a taxpayer's AMT liability from $33,750 to $50,600 for individuals and from $45,000 to $78,750 for married joint filers. Beginning for tax years after 2012, the exemption amounts are indexed for inflation.
- The new law does not include an extension of the temporary 2-percentage-point cut in employee's portion of Social Security tax that had been in place for the last two years. As a result, the payroll rate is now 6.2 percent of wage income, up to a cap of $113,700.
- Renewing several business and individual tax extenders,
- Extension and modification of research credit;
- Extension of various depreciation provisions, including
- Extension of 50-percent bonus depreciation,
- 15-year straight line recovery for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements, and
- Increased expensing limitation and treatment of certain real property as Code Section 179 property;
- Extension of temporary exclusion of 100 percent of gain on certain small business stock for another two years;
- Extension of temporary reduction from 10 years to five years for S corporation recognition period for built-in gains tax (Note: This change is effective for taxable years beginning after December 31, 2011);
- Extension of deduction for state and local sales taxes;
- Extension of exclusion for forgiven home mortgage debt;
- Extension of above-the-line deduction for qualified tuition and related expenses; and
- Extension of tax-free distributions from individual retirement plans for charitable purposes.
1 Also effective January 1, 2013, is the 3.8-percent Medicare surtax on investment income over $200,000 for individuals and $250,000 for joint filers.
If you would like more information about this topic or your own unique situation, please contact Stephen DiBonaventura, any of the attorneys in the Tax Practice Group, George J. Nemphos, any of the attorneys in the Corporate Practice Group or the attorney in the firm with whom you are regularly in contact.
This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.
Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. The Duane Morris Institute provides training workshops for HR professionals, in-house counsel, benefits administrators and senior managers.