On January 2, 2013 President Obama signed into law The American Taxpayer Relief Act of 2012. This was robust legislation, in some ways temporarily and in other ways “permanently” addressing various tax issues. The following is a summary of some highlights of the 59 page bill that might affect you. This will be followed in future blogs by what affects the bill may have on your business and your estate.
- The income tax rate increases to 39.6% for individuals making more than $400,000 a year ($450,000 for joint filers; $425,000 for heads of household);
- The higher exemption amounts for AMT are now permanent and indexed for inflation. The legislation permanently increases the exemption amounts to $50,600 for single filers, $78,750 for joint filers and $39,375 for married taxpayers filing separately;
- Dividends and capital gains are taxed at 20% for individuals making at least $400,000 ($450,000 for joint returns). For those under this income threshold, tax rates from 2012 of 15% or better will generally apply;
- The personal exemption phase-out is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of
household, $250,000 for single filers, and $150,000 for married taxpayers filing separately. Under the phase-out, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold; - The itemized deduction phase-out is reinstated with a threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 for married taxpayers filing separately. Under this phase-out, the total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer’s AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions;
- The American Opportunity education tax credit of qualified tuition and related expenditures is extended for five years;
- The deduction for certain expenses of elementary and secondary school teachers is extended through 2013;
- The exclusion for discharge of qualified principal residence debt is continued through 2013;
- There is a five-year extension of credits that were enhanced as part of the stimulus, including the college tuition credit, the earned income tax credit, and the child tax credit;
- The option to deduct state and local taxes is continued through 2013; and,
- Tax-free distribution from IRA’s used for charitable purposes is reinstated for 2012 and continued through 2013. Special rules for contributions occurring in 2012 and early in 2013 will be forthcoming. The gift must occur by 1/31/2013 and you must be 70 ½ or older;
- Contributions to your 401(k) done on a pre-tax basis may now be permitted to in-plan Roth conversions at any time. Note that a conversion is still a taxable event.
Feel free to call, e-mail, or schedule an appointment to discuss how these might affect you and how you can optimize opportunities in your specific situation.