Key Provisions of the “American Taxpayer Relief Act of 2012” Just Passed by Congress

Congress passed and the President signed the American Taxpayer Relief Act of 2012 (“Act”). The Act includes significant individual and business tax changes that will impact most American taxpayers. Some of the key provisions of the Act include:

Individual Provisions

1.  Income Tax Rates – The Act maintains 2012 income tax rates for individuals earning up to $400,000 per year for single filers ($450,000 for married couples filing joint returns and surviving spouses).   Income above these threshold amounts will be subject to a 39.6 percent tax rate. 

2. Payroll Tax Rates – The Act does not retain the 2 percent payroll tax reduction, therefore, employees will face higher payroll taxes in 2013.

3. Capital Gains and Qualified Dividend Rates -Taxpayers with income less than $400,000/$450,000 threshold amounts will continue to pay tax at a 15% rate on long-term capital gains and qualified dividend income.  However, long-term capital gains and qualified dividends will be subject to a 20% rate for incomes in excess of these threshold amounts. When accounting for the 3.8% surtax on investment income the overall tax rate for high-income taxpayers will be 23.8%. Capital gains and dividends will be subject to a 0% tax rate for taxpayers that fall into tax brackets below 25%.

4.  Alternative Minimum Tax – For tax years 2012 and beyond the alternative minimum tax has been permanently patched by increasing the Alternative Minimum Tax Exemption amount to $50,600 for unmarried taxpayers and $78,750 for married persons filing jointly. These amounts will be adjusted for inflation.

5.  Phase out of Personal and Itemized Deductions – Starting in 2013, personal and itemized deduction exemption phase outs apply to individuals with income greater than $250,000 and married couples filing jointly with income greater than $300,000. Itemized deductions are phased out by reducing taxpayers’ itemized deduction by 3% of the amount by which the taxpayers’ adjusted gross income is greater than these threshold amounts (with the reduction not to exceed 80% of allowable itemized deductions).

6. Education Credit – the Act retains the American Opportunity tax credit which permits eligible taxpayers to claim a credit up to $2,500 for each of the first four years of post-secondary education.

7. Estate and Gift Tax Law Changes – The Estate and Gift Tax Exemption and the Generation-Skipping Tax Exemption permanently remain at $5,120,000 per person (or $10,240,000 for two spouses).  These amounts will be adjusted for inflation.   Although the favorable prior exemptions are maintained, the unified estate and gift tax rate increases to 40% from 35%.   The Act also retains the spousal portability provision which allows spouses to transfer their unused estate tax exemption to their surviving spouse. 

Business Provisions

1.  Bonus and Section 179 Depreciation – For 2013, the 50% bonus depreciation for taxpayers investing in certain capital improvements has been retained. In addition, the section 179 allowance for first year depreciation expense for qualified property has been retroactively increased for 2012 to $500,000. This same level also applies for 2013.  The expense is phased out for qualified property additions exceeding $2,000,000.

 2. Leasehold Improvements – The 15-year straight line amortization for qualified leasehold improvements, qualified restaurant buildings, and qualified retail improvements has been extended to January 1, 2014.      

3. S corporation Built in Gain Recognition Period – For 2012 and 2013, the Act reinstates the favorable rule that reduces the recognition period for recognized built in gain from 10 years to 5 years.

4. Exclusion of 100% Gain on Certain Small Business Stock – The Act retroactively extends this favorable provision for 2012 and 2013 allowing for 100% exclusion of gain from the sale of certain small business stock (generally, C corporation stock with certain requirements) acquired in these years.

5. Research Credit -The Act reinstates the research credit for 2012 and 2013 with changes that liberalize the credit calculation for certain taxpayers.