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April 17, 2014

Taxpayer Relief Act Brings Assortment of Changes

Early on January 1, 2013, the Senate, by a vote of 89 to 8, approved H.R. 8, “the American Taxpayer Relief Act” (ATRA or the Bill). The House of Representatives passed the Bill by a vote of 257 to 167. Following are the major tax provisions:

  • The Bush-era tax cuts were extended permanently for all but the top earners. The maximum income tax rate increases to 39.6% (up from 35%) for individuals making more than $400,000 a year, $450,000 for married couples filing jointly, and $425,000 for heads of household;
  • The two-percentage-point reduction in payroll taxes, commonly known as the FICA or Social Security tax, will be allowed to expire. The employee portion of Social Security contributions will return to 6.2%;
  • The alternative minimum tax (AMT) exemption is increased to $50,600 for individuals and heads of household and $78,750 for married couples filing jointly, and will be permanently adjusted for inflation, resulting in an estimated 30 million taxpayers escaping the AMT;
  • The maximum tax rate on dividends and capital gains will increase to 20% (up from 15%) for individuals with taxable income of at least $400,000 ($450,000 for married couples filing jointly);
  • The “Pease” and PEP (Personal Exemption Phase-out) restrictions on itemized deductions are reinstated with applicable thresholds for the caps at $250,000 for individual filers and $300,000 for married couples filing jointly;
  • For estate, gift, and generation-skipping transfer (GST) tax purposes, for individuals dying and gifts made after 2012, there is a $5 million combined exemption (adjusted for inflation, which is anticipated to be $5,250,000 in 2013), and the top estate, gift, and GST rate is permanently increased from 35% to 40%;
  • A number of individual tax credits, including the child tax credit, the earned income tax credit, and the college tuition credit are extended for five years;
  • Above the line deductions for school teachers’ expenses and the tuition and fees deduction were extended. The option to itemize state and local sales taxes is also extended;
  • The Bill extends the availability of tax-free distributions from IRAs for charitable purposes, which expired at the end of 2011, but is reinstated for 2012 and 2013. Although 2012 has passed, distributions taken in December of 2012 can be transferred to charities for a limited period in 2013, and taxpayers may elect to have tax-free distributions that occur in January of 2013 to be deemed to have occurred on December 31, 2012.

Other nontax provisions in the bill include a “doc fix,” which means that the planned 27% reduction in Medicare reimbursements for physicians will be pushed off until 2014. Long-term unemployment benefits, which were set to expire at the end of 2012, are extended through the end of 2013.

© 2013 Dinsmore & Shohl LLP. All rights reserved.

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Lee is a partner at Dinsmore & Shohl. She directs her primary attention to the needs of privately held businesses and their owners, where she serves as attorney and trusted adviser on business issues as well as tax and estate planning. 

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Staci Norman Criswell is a member of the Family Wealth Planning Practice Group. Staci assists individual and institutional clients in the areas of estate planning from basic wills and trusts to more complicated planning such as GRATs, ILITs, special needs trusts, family foundations and family limited partnerships. She also assists clients with trust and estate administration, charitable giving, and asset protection planning. She has developed an extensive practice in trust and estate litigation, including will contests, will construction actions, and fiduciary litigation. Staci has a broad...

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Frederick J. Caspar is a Partner in the Corporate Department and Chair of the Income Tax Practice Group. Fred concentrates his practice in the area of federal income taxation, including structuring business organizations, acquisitions, divestitures, exchanges, reorganizations, workouts, and syndications. Fred also works extensively on gift, estate and succession planning, being listed in The Best Lawyers in America® in both Tax Law and Trusts and Estates. 

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Thomas Bonasera is a Partner in the Corporate Department and a member of the firm’s Board of Directors and firm Executive Committee Member. Tom focuses his practice on trust and estate administration and litigation, estate planning and closely held business matters. He advises his clients on a broad range of trust and estate planning and litigation matters, obligations and liabilities of trustees and other fiduciaries and trust and estate beneficiary rights and closely held business matters including business disputes. Tom is a frequent lecturer on trusts/estates and fiduciary...

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