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Summary of 2012 Tax Act
On January 2, 2013, the President signed into law the American Taxpayer Relief Act of 2012 (the "Act"). The majority of the Act's provisions are extensions or modifications of existing law. Below is a summary of some of the more important provisions of the new law.
Individual Tax Provisions
1. Income Tax Rates. The Act continues the 2012 income tax rates for married couples filing joint returns for taxable income up to $450,000 per year ($400,000 for single individuals and $425,000 for heads of households). Income above these threshold amounts will be subject to a 39.6% tax rate. The dollar threshold amounts are to be adjusted for inflation in future years. The 2% payroll tax reduction in effect for the years 2011 and 2012 has not been extended (therefore, payroll taxes or self-employment taxes, as applicable, will increase for all working taxpayers).
2. Capital Gains and Qualified Dividend Rates. Taxpayers with income less than the $400,000/$425,000/$450,000 threshold amounts will continue to have long-term capital gains and qualified dividend income taxed at a 15% tax rate. However, long-term capital gains and qualified dividends will be subject to an increased 20% rate for taxpayers with incomes in excess of these threshold amounts. This 20% rate is still an advantageous rate since it is less than the 39.6% highest ordinary income tax rate. For taxpayers whose ordinary income is taxed at less than 25%, the tax on capital gains and dividends will be subject to a 0% tax rate.
3. Alternative Minimum Tax. For tax years commencing after 2011, the alternative minimum tax has been permanently fixed by retroactively increasing the Alternative Minimum Tax Exemption amount from $33,750 to $50,600 for unmarried taxpayers and from $45,000 to $78,750 for married persons filing jointly. These exemption amounts will increase after 2012 by an inflation adjustment.
4. Phase out of Personal and Itemized Deductions. Under the Act, commencing in 2013, personal exemption phase outs and the "Pease" limitation on itemized deductions apply to individuals with income greater than $250,000 and married couples filing jointly with income greater than$300,000. Most itemized deductions (including charitable contributions and mortgage interest deductions) are phased out under the "Pease" limitation 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).
5. Charitable Contributions from IRAs. The Act extends through the end of 2013 the ability of individuals aged 70½ or older to make tax-free distributions from individual retirement plans for charitable contributions up to $100,000 per year. The provision also allows qualified charitable distributions from IRAs made after December 31, 2012 and before February 1, 2013 to be deemed to have been made on December 31, 2012. Also, any portion of a distribution from an IRA to the taxpayer after November 30, 2012 and before January 1, 2013 may be treated as a qualified charitable distribution if the portion is transferred in cash after the distribution to a charitable organization before February 1, 2013.
6. Discharge of Qualified Principal Residence Debt Income Exclusion. The Act extends through 2013 the exclusion of up to $2 million ($1 million if filing separately) of debt discharge on a principal residence.
Business Tax Extenders
7. Research Credit Extended. The Act extends for two years, through December 31, 2013, the research tax credit, which in general is equal to 20% of the amount by which a taxpayer's qualified research expenses for a year exceed its base amount for that year. The Act also contains a provision dealing with the acquisition of the major portion of either a trade or business or separate unit of a trade or business and makes certain other modifications to the existing law. The amendments apply to taxable years beginning after December 31, 2011.
8. Qualified Leasehold Improvements, Restaurant Buildings, Retail Improvements. The Act extends the 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements for expenditures made before January 1, 2014. The amendment applies to property placed in service after December 31, 2011. In addition, taxpayers with expenditures in 2012 and 2013 for qualified real property, which includes qualified leasehold improvements, qualified restaurant property and qualified retail improvement property, can elect to claim Section 179 expensing treatment for such expenditures.
9. Section 179 Expensing Limit. The higher expensing limits in effect in 2011 have been reinstated for 2012 and extended for expenditures made before December 31, 2013. Thus, a taxpayer can expense up to $500,000 of expenditures in 2012 and 2013, subject to a phase-out if total capital expenditures exceed $2 million. The maximum amount that can be expensed in years beginning after 2013 will, without amendment, drop to $25,000.
10. Computer Software. The election to expense qualifying computer software under Section 179 has been extended to expenditures made on or before December 31, 2013.
11. Bonus Depreciation for 2013. For 2013, the 50% bonus depreciation for taxpayers investing in certain capital improvements will apply.
12. Film and Television Productions. The Act extends special expensing rules for certain film and television productions expenditures made in 2012 and 2013.
13. Gain on Small Business Stock. The Act extends the temporary exclusion of 100 percent of gain on certain small business stock acquired before January 1, 2014.
14. Built-In Gains of S Corporations. The law provides for a 5-year holding period for the sale of property with built-in gain for taxable years beginning in 2012 or 2013.
15. Estate and Gift Tax Law Changes. The Estate and Gift Tax Exemption and the Generation-Skipping Tax Exemption permanently remain at $5 million per person (or $10 million for two spouses). These exemption amounts are indexed for inflation in future years. The highest unified estate and gift tax rate (and the Generation-Skipping Tax rate rate) increases to 40% (from its former 35% amount). The Act also provides for spousal portability which allows a deceased taxpayer to transfer any unused estate tax exemption to that taxpayer's surviving spouse.