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Does The American Taxpayer Relief Act of 2012 Affect You?
The House and Senate narrowly prevented the country from going over the financial cliff when they passed the American Taxpayer Relief Act (ATRA) of 2012 on January 1, 2013, which was signed into law by the President the very next day. By extending a good deal of tax provisions and temporarily postponing major automatic spending cuts that were scheduled to take effect in 2013, the ATRA provides certainty by making many of the expiring tax provisions permanent. It also increases the top income and estate tax rates. Here are some brief highlights of the law.
ATRA makes permanent the six federal income tax rates that were in effect for 2012, but creates a new top rate of 39.6% beginning this year for individuals with taxable incomes exceeding $400,000, and married couples filing joint returns with taxable incomes exceeding $450,000. This means that there are now seven tax brackets, 10%; 15%; 25%; 28%; 33%; 35%; and 39.6%.
ATRA makes the existing rates that generally applied to long-term capital gains and qualifying dividends permanent as well. As a result, taxpayers in the lowest two tax brackets will generally pay no tax on long-term capital gains or qualified dividend, and those in the next four brackets will generally continue to pay tax at a maximum rate of 15%. However, starting this year, a new 20% maximum rate will generally apply to those in the 39.6% tax bracket.
ATRA also permanently extends Alternative Minimum Tax relief in the form of increased AMT exemptions amounts. The increased exemption amounts apply retroactively to 2012, and will be indexed for inflation in future years. Also permanently extended are provisions that allow personal tax credits to offset AMT liability.
Additionally, the top federal estate tax rate is permanently increased from 35% in 2012, to 40% beginning in 2013. The $5 million estate and gift tax exclusion amount, indexed for inflation, that applied in 2012 is retained as well.
ATRA also makes permanent the “portability” provisions in effect for 2011 and 2012 that allow the executor of a deceased individual’s estate to transfer any unused exclusion amount to the individual’s surviving spouse unless and until the surviving spouse re-marries.
ATRA phases out personal and dependency exemptions for high-income individuals starting in 2013. (These affected taxpayers are those with adjusted gross incomes exceeding: $300,000 married filing jointly; $275,000 head of household; $250,000 for single; and $150,000 married filing separate.) These individuals may also be subject to a limitation on the amount of itemized deductions they are able to claim.
Finally, ATRA extends many other tax provisions that had expired; some are extended permanently (“Marriage penalty” relief; Dependent care tax credit; adoption tax credit; Child tax credit; Coverdell education savings accounts; Employer-provided education assistance; Student loan interest deduction), others temporarily (Earned income tax credit; American Opportunity credit; $250 deduction for educator classroom expenses; deducting mortgage insurance premiums, state and local sales tax, and qualified higher-education expenses; Charitable IRA distributions; Exclusion of qualified mortgage debt forgiveness; 50% bonus depreciation).
If you have not done so already, you’ll want to take some time now and consult with a qualified attorney or accountant to figure out how you may be affected, or how you can take advantage of some of these changes to protect your assets.
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