The American Taxpayer Relief Act was passed by Congress on January 1, 2013 and is expected to be quickly signed by the President and enacted into law. The following is a summary of The American Taxpayer Relief Act's major tax provisions:
- Income tax rates – for tax years beginning after 2012, the individual income tax rate increases to 39.6% (up from 35%) for single individuals with taxable income of more than $400,000 a year ($450,000 for joint filers, $425,000 for heads of household and $225,000 for married taxpayers filing separately). The Bush tax rates remain intact for individuals with taxable income under $400,000. These dollar amounts are inflation-adjusted for tax years after 2013;
- Dividends and capital gains - for tax years beginning after 2012, the top tax rate for dividends and capital gains increases to 20% (up from 15%) for individuals with income over $400,000 ($450,000 for joint returns). When you factor in the 3.8% surtax on investment-type income and gains for tax years beginning after 2012, the overall tax rate for these high-income taxpayers will be 23.8%;
- Deduction limitation for high-income individuals – for tax years beginning after 2012, the Personal Exemption Phaseout (PEP), which had previously been suspended, 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 this PEP phaseout, 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. These dollar amounts are inflation-adjusted for tax years after 2013;
- Deduction limitation for high-income individuals – for tax years beginning after 2012, the "Pease" limitation on deductions, which had previously been suspended, 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. For taxpayers subject to the "Pease" limitation, the total amount of their 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. These dollar amounts are inflation-adjusted for tax years beginning after 2013;
- Expiration of 2% payroll tax cut – the 2% reduction in payroll taxes for the OASDI (known as the Social Security tax) will be allowed to expire;
- Alternative Minimum Tax (AMT) patch – the higher exemption amounts for AMT (known as the "AMT patch") are made permanent resulting in an estimated 30 million taxpayers escaping being subject to the AMT;
- Estate and transfer taxes - for estate, gift and generation-skipping transfer (GST) tax purposes, for individuals dying and gifts made after 2012, there is a $5 million exemption (as indexed for inflation). However, it permanently increases the top estate, gift and generation-skipping transfer tax rates to 40% (up from 35%);
- Individual tax breaks extended – a number of individual tax provisions have been retroactively extended through 2013. In addition, there is a five-year extension of various credits, including the college tuition credit, the earned income credit and the child tax credit.
Business tax breaks extended – many key business tax breaks are extended, including depreciation tax provisions such as the first-year "bonus" depreciation and 15-year straight line cost recovery for qualified leasehold improvements, and Section 179 (although limits are still unknown), as well as the research tax credit and the domestic production activities deduction.
Energy- related tax breaks extended – various energy credits are extended.
For more information visit: http://www.whitehouse.gov/the-press-office/2013/01/01/fact-sheet-tax-agreement-victory-middle-class-families-and-economy