Congress has voted to avert the fiscal cliff by passing the 2012 American Tax Relief Act. Some of this law is permanent, some temporary and some retroactive to January 1, 2012. Below is a summary of some of the more significant portions of this legislation:
Individual Income Taxes:
- Ordinary Income Tax Rates – All individual marginal tax rates have been retained, with a new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head of household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).
- Capital Gain Tax Rates – Beginning 1/1/2013, a 20% tax rate applies to taxpayers if their income exceeds the threshold for the 39.6% ordinary income tax bracket. (The old 15% tax rate is still applicable on income below the threshold).
- Qualified Dividends – Still taxed at the capital gain tax rates.
- Itemized Deduction Phase Out – Beginning 1/1/2013, taxpayers will start to lose the benefits of their Itemized Deductions if their adjusted gross income exceeds $250,000 for single filers and $300,000 for married filing jointly.
- Personal Exemptions Phase Out – Beginning 1/1/2013, taxpayers will start to lose the benefits of their Personal Exemptions if their adjusted gross income exceeds $250,000 for single filers and $300,000 for married filing jointly.
- Alternative Minimum Tax “Patch” – Congress has made the AMT “Patch” permanent indexed for inflation. For 2012, the exemption amounts are $78, 750 for married taxpayers filing jointly and $50,600 for single filers.
- $1,000 child tax credit – Has been made permanent
- The dependent care credit rules – Have been made permanent (allowing a credit to be calculated based on up to $3,000 of expenses per child or up to $6,000 for more than one.)
- Education and Tuition Deductions – The American Opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2017. Cancellation of Debt – Cancellation of indebtedness for qualified personal residence up to $2,000,000 has been extended to 12/31/2013.
- Payroll Tax Credit – The 2% payroll tax credit on the employees FICA withholding has been repealed.
Federal Estate and Gift Taxes:
- The estate and gift tax exclusion amounts have been retained and made permanent at $5,000,000 indexed for inflation ($5.112 million for 2012), but the top tax rate has increased from 35% to 40%. Effective 1/1/2013.
Business Related Taxes:
- Depreciation Deduction Section 179 – Sec. 179 deduction for expensing purchases of personal property has been reinstated as $500,000, retroactive to 1/1/2012 and extended to 12/31/2013
- Bonus Depreciation – 50% Bonus Depreciation has been reinstated retroactively to 1/1/2012 and extended to 12/31/2013.
- Additional hospital insurance tax on high-income taxpayers – The employee portion of the hospital insurance tax part of FICA, normally 1.45% of covered wages, is increase to 0.9% on wages that exceed the threshold amounts of $250,000 in the case of joint return filers, $125,000 for married filing separate, and $200,000 in any other case.
- Medicare tax on investment income – Starting 1/1/2013 a tax on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income exceeds the threshold amounts of $250,000 for joint return filers, $125,000 for married filing separate, and $200,000 in any other case.
- Net investment income means investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, annuities, royalties, rents, and net gains from disposition of property, other than such income derived in the ordinary course of a trade or business.
- However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income.