January 8, 2013 -
The American Taxpayer Relief Act has rightfully garnered the nation's attention. To assist our clients and fellow advisors, following is a brief summary of some of the key provisions of the new law designed to keep our nation from falling off the "Fiscal Cliff:"
The Act maintains the $5 Million exemption (as indexed for inflation) for estate, gift, and generational skipping taxes. However, the rate on transfers above this threshold is increased to 40%. The Act also keeps the portability provisions which allow a surviving spouse to use the remaining exemption of the first spouse to die.
The top tax rate rises to 39.6% for high income taxpayers ($450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married taxpayers filing separately).
The tax rate for capital gains and dividends will permanently rise to 20%, plus a surtax of 3.8% (for a total of 23.8%) for capital gains and dividends earned by taxpayers with incomes above $400,000 ($450,000 for married taxpayers). There will be three classes of rates for lower income taxpayers:
1. For taxpayers whose total taxable income would be 10%-15%, the rate on capital gains and dividends is fixed at 0%.
2. For taxpayers whose total taxable income would be 25% or more, but whose income is $200,000 ($250,000 for married taxpayers or $125,000 for married filing separately) or less, capital gains and dividends will be 15%.
3. For taxpayers with income between $200,001 ($250,001 for married taxpayers or $125,001 for married filing separately) and $400,000 ($450,000 for married taxpayers or $200,000 for married filing separately), the tax rate for capital gains and dividends will stay at 15%. However, the capital gains and dividends will also be subject to the 3.8% "surtax" mandated by the federal government's health care bill.
The Act revives personal exemption phase-outs and limitations on itemized deductions, thereby affecting taxpayers earning over $300,000 for joint filers and surviving spouses; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married taxpayers filing separately. The total amount of allowable itemized deductions is reduced by 3% of the amount by which the taxpayer's adjusted gross income exceeds that threshold, with the reduction capped at 80% of the otherwise allowable itemized deductions.
For the next five years, the Act extends the following credits:
1. The American Opportunity Tax Credit, which permits qualifying taxpayers to claim a credit of 100% of the first $2,000 of qualified tuition and related costs, and 25% of the next $2,000, for a maximum tax credit of $2,500 for the first four years of college;
2. Easier rules for qualifying for the refundable child credit; and
3. Many earned income tax credit changes relating to higher credit amounts for taxpayers with at least three children, as well as increases in phase-out amounts for surviving spouses, single individuals, and heads of households.
The Act revives or extends numerous additional tax preferences, and provides substantial business tax breaks. Numerous energy credits were also extended, including a credit for facilities producing energy from certain renewable resources. Finally, for transfers after December 31, 2012, an applicable retirement plan (including a qualified Roth contribution program) allows participants to transfer amounts to designated Roth accounts, and such transfers will be treated as a taxable qualified rollover contribution.