Lower, taxpayer-friendly income tax and capital gains rates, along with more than 50 other tax provisions enacted in 2001 and 2003, generally referred to as the “Bush-Era Tax Cuts,” expired at midnight on January 1, 2013. However, a late maneuvering has created a retroactive bill that extends many provisions. So what does this mean to you? Some quick highlights:
- A new, higher tax bracket of 39.6% rate (up from 35%) for families with taxable income higher than $450,000 and individuals with taxable income higher than $400,000 annually.
- A 2% Social Security tax increase due to the payroll tax holiday expiring.
- A Higher Alternate Minimum Tax (AMT) exemption amount. This change is permanent and retroactive to 2012 and is projected to protect 30 million taxpayers from an AMT liability.
- Personal tax credits: The $1,000 child tax credit and the American Opportunity college tuition tax credit will be extended.
- A tax rate increase to 20% (up from 15%) on dividends and capital gains for individuals making more than $400,000 and families making $450,000 annually.
- Pease itemized deductions and Personal Exemption Phase-Out (PEP) will be reinstated, however the income thresholds will be changed. For married filing joint status the phase out starts at $300,000 of income for the Pease limitation and for the Personal Exemption Phase-out (PEP). What this means is that potentially your itemized deductions for 2013 will be limited if your income exceeds certain thresholds.
- Marriage Penalty relief was permanently extended.
- Estate Tax will remain relatively unchanged. $5 million exemption (adjusted for inflation) which effectively allows for $10 million for married couples. However, a tax rate of 40% (up from 35% in 2012) will be applied.
Business Tax Extenders
The act extends many business tax credits and provisions. The research and development activities credit extension is notable. Additionally, increased expensing under section 179 was extended through the end of 2013. Bonus depreciation allowing for 50% year one depreciation was also extended through 2013. Other business provisions, including energy tax credits and provisions, have been extended, for a more complete list please contact your Delap professional.
A complete copy of the American Taxpayer Relief Act of 2012 is available American Taxpayer Relief Act of 2012