For many Americans the New Year’s Day channel surfing included stops at news outlets for updates on the status of the “fiscal cliff” legislation. After many starts and stops the terms of a fiscal cliff resolution were successfully negotiated. In the early morning of January 1, 2013 the Senate approved the American Taxpayer Relief Act (the “Act”). Later that day the House of Representatives passed the bill. The President signed the bill on January 2nd.
The highlights of this new legislation include the following:
- For 2013 the income tax rate increases to 39.6% (up from 35%) for individuals making more than $400,000 a year ($450,000 for joint filers; $425,000 for heads of household).
- The two-percentage-point reduction in payroll taxes for Old Age, Survivors and Disability Insurance (OASDI) tax (the Social Security tax) that was effective for 2011 and 2012 was allowed to expire.
- The higher exemption amounts for the alternative minimum tax (the “AMT patch”) are made permanent. For years after 2011, the Act increases the AMT exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. These amounts are indexed for inflation. This permanent fix eliminates the need for an annual AMT patch, and results in an estimated 30 million taxpayers escaping the AMT.
- Beginning in 2013 dividends and capital gains are taxed at 20% (up from 15%) for individuals making at least $400,000 ($450,000 for joint returns).
- The Personal Exemption Phase-out (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 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. In general, under the phase-out, 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.
- The “Pease“ limitation on itemized 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 (one-half of the otherwise applicable amount for joint filers) 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.
- For estate, gift, and generation-skipping transfer (GST) tax purposes, for individuals dying and gifts made after 2012, there is a $5 million exemption (adjusted for inflation). This inflation-adjusted exemption was $5,120,000 in 2012, and is estimated to be $5,250,000 for 2013. The top estate, gift and GST rate is permanently increased from 35% to 40%.
- Congress continued the law that permits a surviving spouse to claim any unused estate and gift tax exemption of a deceased spouse on the surviving spouse's estate tax return, often referred to "portability" of estate and gift tax exemption between spouses. Portability prevents a loss of exemption when the deceased spouse does not have enough assets to fully use his or her estate and gift tax exemption, and allows the surviving spouse to benefit from the balance of unused exemption.
- Proposals that could adversely affect taxpayers about minimum annuity terms for grantor retained annuity trusts (GRATs), changes of how grantor trusts are treated for estate tax purposes and limitations on valuation discounts for family-owned entities were not included in this tax bill but could be considered in the future.
- The Act extends for two years, through December 31, 2013, the rules allowing tax-free distributions from IRAs to public charities by individuals age 70 1/2 and older, up to a maximum of $100,000 per taxpayer each year. Special transition rules allow taxpayers to recharacterize distributions in January, 2013 as made on December 31, 2012, and permit distributions made in December, 2012 to be treated as a charitable distribution if transferred to a charity before February 1, 2013.
- A number of individual tax provisions have been retroactively extended through 2013. In addition, there is a five-year extension of credits that were enhanced as part of the stimulus, including the college tuition credit, the Code Sec. 32 earned income tax credit, and the Code Sec. 24 child tax credit.
- There were numerous business-specific extensions, but the extensions applicable to most businesses are:
- Extension and modification of bonus depreciation.
- Extension of increased expensing limitations and treatment of certain real property as section 179 property.
- Extension and modification of research credit
- Extension of Sec. 199 domestic production activities deduction
- Various energy credits are also extended.
- Other nontax provisions in the bill include a “doc fix,” which stops a 27% reduction in payments to Medicare doctors scheduled to go into effect. Spending cuts as offsets to accomplish this. Unemployment benefits, which were set to expire at the end of 2012, are extended for the long-term unemployed through the end of 2013.