Obama Signs ‘American Taxpayer Relief Act’ to Avert Fiscal Cliff
On January 2, 2013, President Obama signed the (H.R.8) the “American Taxpayer Relief Act” (the Act), aimed at resolving many of the “fiscal cliff” issues. While the Act would, among other things, increase income taxes for high-income individuals, it would also prevent many other tax rate increases and extends certain tax benefits.
For example:
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Income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35%, but a 39.6% rate will apply to income in excess of $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 (indexed for inflation).
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The top rate for capital gains and dividends will rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will permanently be subject to a 0% rate. The rate of 15% will continue to apply to taxpayers subject to at least a 25% rate of tax on their ordinary income, but whose income is below the $400,000/$450,000 thresholds.
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With respect to the estate, gift and generation-skipping transfer tax, the Act keeps the exemption level permanently at $5,000,000 (indexed for inflation), but also permanently increases the top rate from 35% to 40%. The 2013 level, while not yet official, has been estimated to be $5,250,000. Additionally, the Act makes permanent the portability law that allows a spouse to transfer his or her estate tax exemption to a surviving spouse. Note that unrelated to the Act, the annual gift tax exclusion for 2013 has increased to $14,000.
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The Personal Exemption Phaseout 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 (adjusted for inflation). 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 exceeds the applicable threshold. The “Pease” limitation on itemized deductions is reinstated with the same starting thresholds as the Personal Exemption Phaseout, listed above. 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 adjusted gross income exceeds the threshold amount, not to exceed 80% of the otherwise allowable itemized deductions.
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The Act provides permanent alternative minimum tax (AMT) relief. The AMT is the excess, if any, of the tentative minimum tax for the year over the regular tax for the year. The tentative minimum tax is calculated by modifying a taxpayer’s taxable income with various adjustments and preferences, and then subtracting an exemption amount.Retroactively effective for tax years beginning after 2011, the Act (a) increases exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately and, for tax years beginning after 2012, it indexes these exemption amounts for inflation, and (b) allows an individual to offset his entire regular tax liability and AMT liability by certain nonrefundable personal credits.
The Act also extended various tax breaks and credits, such as extending:
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the 50% bonus depreciation provisions with respect to property placed in service after Dec. 31, 2012;
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fifteen-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements;
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the exclusion from a tax-exempt organization’s “unrelated business taxable income” items, such as interest, rent, royalties, and annuities paid to it from a controlled entity;
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treatment of certain dividends of regulated investment companies as “interest-related dividends”;
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the reduction in an S corporation’s recognition period for built-in gains tax, with a 10-year period instead of a 5-year period;
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basis adjustments to stock of S corporations making charitable contributions of property;
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tax-free distributions from individual retirement plans for charitable purposes; and,
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certain credits with respect to facilities producing energy from certain renewable resources. A facility using wind to produce electricity will be a qualified facility if construction has begun before 2014.
The Act did not extend the 2% payroll tax cut. The Act also postpones the sequester for two months.
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