American Taxpayer Relief Act of 2012

 

On January 1, 2013, Congress passed the "American Taxpayer Relief Act of 2012 (H.R. 8)." President Obama signed the Act into law on January 2, 2013. This act addressed the tax aspect of the "fiscal cliff." It allows the Bush-era tax rates to continue after year 2012 except for higher income taxpayers ($400,000 for individuals and $450,000 for families). It also permanently patches the Alternative Minimum Tax (AMT), and extends many tax provisions that expired at the end of year 2011 and 2012. Below is a summary of the major tax aspects of the new law:

Income Tax Rates for Individuals

Beginning in 2013, the Bush-era tax rates have been extended for everyone except taxpayers who have taxable income above $400,000 if single, $425,000 if head of household, $450,000 if married filing jointly, and $225,000 if married filing separately. Taxable income over these amounts will be taxed at the new 39.6% rate. Previously, under the Bush-era tax rates, the maximum rate was 35%.

Long-Term Capital Gain Rates and Qualified Dividends

Beginning in 2013, the Bush-era maximum long-term capital gain rate and qualified dividend rate of 15% is now 20% for taxpayers who have income above $400,000 if single, $425,000 if head of household, $450,000 if married filing jointly, and $225,000 if married filing separately. All other taxpayers will continue to have a maximum 15% long-term capital gain rate and qualified dividend rate. For those taxpayers who have income that fall within the 10% or 15% income tax rates, they will continue to have a 0% rate on long-term capital gains and qualified dividends until their income reaches the top of the 15% income tax bracket.

Alternative Minimum Tax (AMT)

The tax act permanently "patches" the Alternative Minimum Tax (AMT) for years 2012 and beyond by increasing the exemptions amounts and allowing nonrefundable personal credits in full against the regular income tax. Also beginning in 2013, the tax act allows an annual inflation adjustment to the exemption amount.

Sales Tax

The tax act extends the state and local sales tax deduction in lieu of state and local income taxes through December 31, 2013. Prior to the enactment of this tax bill, the sales tax deduction had expired on December 31, 2011. The deduction is now available retroactive to January 1, 2012.

Mortgage Insurance Premiums (PMI)

The tax act extends the qualified mortgage insurance premium deduction (PMI) through December 31, 2013. Prior to the enactment of this tax bill, the mortgage insurance premium deduction had expired on December 31, 2011. The deduction is now available retroactive to January 1, 2012.

Exclusion of Cancellation of Debt on Principal Residence

The tax act extends the exclusion from income of qualified principal residence indebtedness through December 31, 2013. Prior to the enactment of this tax bill, the exclusion from income of qualified cancellation of debt on a principal residence had expired on December 31, 2012. It is now extended for one year.

Child Tax Credit

The tax act makes the $1,000 child tax credit permanent. Prior to the enactment of this tax bill, the child tax credit would have decreased to $500 beginning in 2013.

Earned Income Credit (EIC)

Enhancements that were made to the EIC during the Bush-era have been extended to December 31, 2017. This includes the reformed relationship test, modified tie breaking rule, and a simplified definition of "earned income."

Child and Dependent Care Credit

The tax act makes permanent enhancements created during the Bush-era which is the 35% maximum credit rate and the $3,000 (for one individual) and $6,000 (for two or more individuals) cap on qualified expenses.

Teacher Classroom Expenses - Educator Expenses

The tax act extends the qualified above-the-line educator expense deduction up to $250 per taxpayer through December 31, 2013. Prior to the enactment of this tax bill, the educator expense deduction had expired on December 31, 2011. The deduction is now available retroactive to January 1, 2012.

Education Credit - American Opportunity Tax Credit (AOTC)

The tax act extends the availability of the American Opportunity Tax Credit through December 31, 2017. Prior to the enactment of this tax bill, this credit would have expired on December 31, 2012.

Above-the-Line Tuition and Fees Deduction

The tax act extends the above-the-line tuition and fees deduction until December 31, 2013. Prior to the enactment of this tax bill, this deduction had expired on December 31, 2011. This deduction is now available retroactive to January 1, 2012.

Student Loan Interest Deduction

The tax act permanently extends the suspension of the 60-month rule for the allowable above-the-line student loan interest deduction up to $2,500. Prior to the enhancement of this tax bill, beginning in 2013, student loan interest would not have been deductible on loans for which interest had been paid for over 60 months.

Employer-Provided Education Assistance

The tax act permanently extends the exclusion from income and employment taxes of employer-provided education assistance up to $5,250.

IRA Distributions to Charity

The tax act extends the provision allowing tax-free distributions up to $100,000 per taxpayer from individual retirement accounts (IRA's)  to public charities by taxpayers who are at least age 70 1/2 through December 31, 2013. Prior to the enactment of this tax bill, the tax-free distribution from an IRA to a charity had expired on December 31, 2011. The tax-free distribution is now available retroactive to January 1, 2012.

Marriage Penalty Relief

The tax act extends all existing marriage penalty relief such as the increase in basic standard deduction for a married couple filing jointly and an increase in the size of the 15% tax bracket for married couples.

Limitation on Itemized Deductions and Personal Exemption Phase-out

Beginning in 2013, the tax act revives the limitation on itemized deductions and the personal exemption phase-out rules. The limitation and phase-out begins at $300,000 for married filing jointly, $275,000 for head of household, $250,000 for single, and $150,000 for married filing separately.

Energy Credit for Certain Energy Efficient Improvements to Principal Residence

The tax act extends through December 31, 2013 the nonbusiness energy property credit which has a lifetime credit limit of $500 ($200 limit for windows and skylights). Prior to the enactment of this tax bill, the nonbusiness energy credit had expired on December 31, 2011. The credit is now available retroactive to January 1, 2012.

Section 179 - Business Expensing

The tax act extends through December 31, 2013 the enhanced Internal Revenue Code Section 179 expensing. For tax years 2012 and 2013, the maximum amount is $500,000 with a $2,000,000. investment limit. Prior to the enactment of this tax bill, the maximum 2012 Section 179 expensing amount was $139,000 with a $560,000 investment limit.

Bonus Depreciation

The tax act extends the 50% bonus depreciation (special depreciation allowance) through December 31, 2013.

Qualified Leasehold Improvements

The tax act extends the 15-year recovery period for qualified leasehold improvements, qualified retail improvements, and qualified restaurant property through December 31, 2013. Prior to the enactment of this tax bill, the 15-year recovery period had expired on December 31, 2011 and reverted to a 39-year recovery period. The 15-year recovery period is now available retroactive to January 1, 2012.

Other Provisions of the Tax Act

Various other provisions are included in the tax act such as:

  • A maximum federal estate tax rate of 40% with a $5 million exclusion (annually adjusted for inflation) for estates of decedents dying AFTER December 31, 2012

  • A 40% tax rate and a unified estate and gift tax exemption of $5 million (inflation adjusted) for gifts made AFTER December 31, 2012

  • Permanent extension of Bush-era enhancements to the adoption credit and the income exclusion for employer-paid or reimbursed adoption expenses up to $10,000 (indexed for inflation)

  • Permanent extension of Bush-era enhancements to Coverdell Education Savings Accounts

  • Extension of the Research Tax Credit through 2013

  • Extension of the Work Opportunity Tax Credit through 2013

View the Entire Tax Act Passed By Congress and Signed into Law

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