Key Provisions of the American Taxpayer Relief Act of 2012

Congress passed the American Taxpayer Relief Act of 2012 (2012 Taxpayer Relief Act), which the President quickly signed into law on Jan. 2, 2013. We have compiled an overview of the key provisions of this new law. We encourage you to review them and call us if you have any concerns about how your tax situation will change as we prepare your returns for this filing season.

  • A Tax Increase on the Highest Incomes in 2013. Although most taxpayers avoided a tax increase, rates did rise for top earners. Taxpayers (including those who receive income through partnerships and S corporations) who earn more than $400,000 ($450,000 for married taxpayers filing jointly) have a marginal tax rate of 39.6%. All other existing rates remain the same.
  • Higher Capital Gains Rates for Top Earners. The same individuals who are subject to the new 39.6% top rate on income now face a 20% rate on capital gains and dividends, up from 15%. Taxpayers in the 10% and 15% income brackets have a zero capital gains rate and those in the middle will continue to pay 15%.
  • Higher Personal Exemptions Phase-out Levels. The phase-out levels for personal exemptions and itemized deductions have been raised to $300,000 for married couples and surviving spouses and $250,000 for individuals.
  • Permanent AMT Inflation Indexing. The alternative minimum tax originally was intended to prevent high-income individuals from avoiding taxes. In the absence of a patch for last year, more than 60 million middle-income taxpayers might have been subject to the AMT on their 2012 income. After years of last-minute AMT “patches,” the new law permanently indexes the AMT to inflation starting in tax year 2012. For income you earned in 2012, the exemptions are $50,600 for individuals and $78,750 for married taxpayers filing jointly.
  • Restoration of the Full Rate for Social Security and Medicare Taxes. The law did not extend the 2% cut for the employees’ portion of the Social Security payroll tax, which means it will go back to the full rate of 6.2% on income up to $113,700 in 2013.
  • Clarity on Estate and Gift Taxes. After years of uncertainty in this area, the new law holds the estate and gift-tax exclusion at $5 million, indexed for inflation ($5.12 million in 2012). The top tax rate jumped to 40% from 35% as of Jan. 1, 2013, but without this change, it would have soared to 55% with a $1 million exclusion amount. The act made permanent the estate tax portability election, which allows a surviving spouse to use a deceased spouse’s unused exemption amount.
  • Marriage Penalty Relief Retained. Certain taxpayers filing jointly will no longer have to worry about paying more than if they filed as single taxpayers; joint filers also will enjoy a larger standard deduction.
  • Education Tax Benefits Extended. Many deductions for education expenses were set to expire at the end of last year, but they will remain in place under the new law. For example, the law extends the deduction for qualified education expenses through 2013 and retroactively for the 2012 tax year.
  • Conversions to Roth Retirement Plans. The new law allows participants in an employer-sponsored 401(k) to transfer any amount to a Roth 401(k) —the funds will be taxed upon conversion. 
  • Tax Relief for Mortgage Loan Modifications. Taxpayers struggling to pay their mortgages, or whose home values have fallen below their purchase price, were given another year of tax relief on any qualifying “indebtedness income” they may receive as a result of a loan modification or short sale on their principal residence.
  • Tax-Free Distributions from an IRA to a Public Charity. Taxpayers aged 70 ½ or older are allowed tax-free distributions from an individual retirement account to a public charity, up to a maximum of $100,000 per taxpayer per year through December 31, 2013.  Further, a taxpayer may treat IRA distributions to a public charity in January 2013 as if these distributions had been made on December 31, 2012, and these distributions will not count against the 2013 limit.  Also, a taxpayer is allowed to treat IRA distributions made in December 2012 as charitable distributions if the taxpayer transfers the amount received to a public charity prior to February 1, 2013.

Also, taxpayers who have net investment income beginning in 2013 will face a 3.8% surtax on categories of certain unearned income, potentially increasing the total tax rate to 43.4%. This tax was already slated to go into effect as a result of health care reform.

We can help you understand the effect that these changes will have on your tax situation. In addition to preparing your return in a way that maximizes your tax advantages, we are also available after tax season to advise on strategies and planning decisions that will help you minimize taxes and meet your financial goals.

Please don’t hesitate to contact us today at 281-759-1120 to schedule an appointment to begin discussing your options.