The House of Representatives approved on January 1, 2013 compromise tax legislation earlier passed by the Senate, and sent it to President Obama for signature. The title of the legislation is American Taxpayer Relief Act of 2012, HR 8.
The legislation generally “permanently” extends the Bush tax rate cuts for most taxpayers. A 39.6% bracket is restored for marrried taxpayers filing joint returns with taxable income of $450,000 or more, heads of household with taxable income of $425,000 or more and other singles with taxable income of $400,000 or more. For long-term capital gains and qualified dividends, the maximum tax rate is increased from 15% to 20% for those taxpayers with taxable income over the same thresholds.
(Remember the additiional 3.8% Medicare tax on certain investment income will remain in place for married taxpayers filing joint returns with adjusted gross income of $250,000 or more and singles with adjusted gross income of $200,000 or more. Techinically, this tax is not an “income tax”.)
There will be phaseouts of personal exemptions and itemized deductions for certain high-income taxpayers ($300,000 AGI for married taxpayers filing joint returns, $275,000 for heads of household, $250,000 for other singles.)
The estate and gift tax lifetime exemption of $5 million is “permanently” retained, with a maximum estate and gift tax rate of 40%.
A very significant provision of the legislation is a permanent increase in the alternative minimum tax exemptions to $78,750 for married taxpayers filing joint returns and $50,600 for singles for 2012, to be indexed for inflation thereafter. This change will reduce some of the drama for future “fiscal cliffs”.
The 2% reduction in employee social security withholding was not extended for 2013.
There are five-year extensions (through 2017) for these provisions,
* The American Opportunity (higher education) Tax Credit
* The child tax credit
* The Earned Income Tax Credit
There are two-year extensions (through 2013) for these provisions (not a complete list)
* Deduction from gross income of certain expenses of elementary and secondary school teachers
* Alternative deduction for state and local general sales taxes
* Special rule for contributions of capital gain real property made for conservation purposes
* Deduction from gross income of qualified tuition and related expenses
* Exclusion from gross income of certain distributions from individual retirement plans directly to a charity
(A special election is available to transfer a distribution previously received after November 30, 2012 and before January 1, 2013 as transferred directly to a charity if the “rollover” to the charity is completed before February 1, 2013. Individuals may also elect to treat direct transfers from IRAs to charities during January, 2013 as 2012 distributions. See your tax advisor for details.)
* Research Credit
* Increased expensing limitations, including certain computer software and certain qualified real property
* 100% exclusion of gain for certain small business stock (This is complex. See your tax advisor for details.)
* Basis adjustment to stock of an S corporation for charitable contributions of property
* Reduction in the waiting period from 10 years to 5 years for the recognition of built-in gains of certain S corporations.
There is a technical correction that the built-in gain rules for the year of sale will apply when an asset is reported using the installment sale method.
One-year extension for these provisions (not a complete list)
* Exclusion from income of certain cancellation of debt income of qualified principal residence indebtedness (through 2013).
* 50% bonus depreciation for certain new business property (through 2013).
* Election to accelerate the AMT credit instead of claiming bonus depreciation for property acquired before Janaury 1, 2014.
I didn’t find an extension of the refundable minimum tax credit, so it appears it expired after 2012.
These are just a few highlights of the legislation. See your tax advisor for more details
In general, the legislation is a big relief from most taxpayers and their advisors. I expect to see more comprehensive tax reform in the future, so stand by for more changes ahead.
Here’s a link to a radio interview with Michael Gray on The Financial Survival Network about the “fiscal cliff” tax legislation enacted January 2, 2013.