Last Minute “Fiscal Cliff” Agreement Averts Tax Consequences

On January 1, 2013, the “American Taxpayer Relief Act of 2012” was passed.  Although we technically went over the “fiscal cliff”, the bill will go into effect retroactively for tax years beginning after 2012.  This act prevents many of the tax increases that were scheduled to go into effect and extends some of the tax breaks that were scheduled to expire.

At this time, we are unsure if IRS tax filing will be delayed because of the late passing of this bill.  However, we ask clients to please submit their information to HBE in a timely manner as they’ve done in the past so that we may begin preparing their returns. IRS delays will not affect our preparation timeline.  We will provide additional notification if we become are aware of any filing delays related to the recent legislation.

Below is a summary of some of the provisions passed with this Act.

  • For tax years beginning after 2012, the income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35%, but with the addition of a 39.6% rate applying for taxable income exceeding $400,000 ($450,000 married filing jointly).
  • The top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers).  The 15% rate is retained for taxpayers in the middle brackets while the 0% rate will be permanently retained for taxpayers in the 10% and 15% brackets.
  • Alternative minimum tax (AMT) relief was provided. Retroactively effective for tax years beginning after 2011, AMT exemption amounts permanently increased to $50,600 for single filers, $78,750 for joint filers and $39,375 for married filing separately. For tax years beginning after 2012, these exemption amounts will be indexed for inflation.  The Act also permanently allows an individual to offset his entire regular tax liability and AMT liability by the nonrefundable personal credits.
  • Limitations on itemized deductions have been reinstated with a starting threshold for those making $300,000 for joint filers, $275,000 for heads of household, $250,000 for single filers, and $150,000 for married taxpayers filing separately.
  • From the American Recovery and Investment Act of 2009 (expiring 2012), the following items were extended for 5 years:
    • American Opportunity tax credit for college tuition and related expenses (for a max credit of $2,500)
    • Rules for refundable child credit and earned income tax credit
  • The following items were extended for individuals for 2012 and 2013:
    • Deduction for expenses of elementary and secondary school teachers
    • Exclusion for discharge of qualified principal residence indebtedness
    • Treatment of mortgage insurance premiums as qualified residence interest
    • Option to deduct state and local taxes as an itemized deduction
    • Above-the-line deduction for qualified tuition expenses
  • Tax-free distributions from individual retirement plans for charitable purposes, which expired at the end of 2011 has now been extended for 2012 and continued through 2013. Because 2012 has already passed, a special rule permits distributions taken in 2012 to be transferred to charities for a limited period in 2013. Another special rule permits certain distributions made in 2013 as being deemed made on Dec. 31, 2012.
  • Depreciation provisions were retroactively modified and extended. Expensing limitations for Code Sec. 179 property were increased to $500,000 for 2012 and 2013. Bonus depreciation at the 50% rate was extended through 2013.
  • The Act prevents increases in estate and gift taxes by permanently keeping the exemption level at $5,000,000 (as indexed for inflation). However, the top estate and gift tax rate permanently increased from 35% to 40%. The Act also continues the portability feature that allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse.

Various business credits were also extended through 2013, including:

  • Research credit
  • Work Opportunity tax credit
  • Reduction in S-Corporation built-in-gains period from 10 years to 5 years

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