Tax Special - American Tax Relief Act

By Ami Shah, ACA, CPA

Several tax cuts called "Bush-era tax cuts" were going to expire December 31, 2012 raising the taxes by $ 494 billion in 2013.  Spending cuts of $ 1.2 trillion were instated to be effective from January 1, 2013.  Combination of this unrelated fiscal policies were going to damage our already injured economy creating "fiscal cliff".  There has been so much hype about the "fiscal cliff" last year, everyone was waiting for Congress to take action.  Now that the American Tax Relief Act 2012 has been signed by the president let's see what is means to most of the tax payers.  The summary if you were to say it means lowers taxes for layman by extension of Bush-era tax cuts and more taxes for high income taxpayers with enactment of higher marginal tax rate of 39.6%. 

Highlights of the American Tax Relief Act 2012

• Without this act the number of household subject to estate tax would have increased significantly with the basic exclusion amount of 1 million.  The estate, gift, and generation-skipping transfer tax rates are now unified, and permanently rise to 40% on amounts over $5,000,000 (indexed to inflation), up from 35%. The Act also makes portability, where the second spouse can use the first spouse’s unused estate tax exemption, permanent.  Estates of decedents who die during 2013 have a basic exclusion amount of $5,250,000, up from a total of $5,120,000 for estates of decedents who died in 2012
• Lower tax rates were set to expire on December 31, 2012. The 10% tax bracket would have been eliminated, and the rate of 15% would have been the lowest rate, with the rate of 25% increasing to 28%, 28% to 31%, 33% to 36%, and 35% to 39.6%.  Now the all the tax rates from 2012(10%, 15%, 25%, 28%, 33% and 35% ) remain the same for the taxpayer whose income does not exceed the following thresholds: $400,000 for single filers, $425,000 for heads of household, $450,000 for those filing jointly, and $225,000 for those who are married filing separately.  a new tax rate of 39.6 percent has been added for individuals whose income exceeds the thresholds.
• Preferential tax rate of 15% for long term capital gains and dividends is raised to 20% for the taxpayers making more than the above thresholds.
• The Act set permanent rates for the Alternative Minimum Tax (AMT).  The AMT exemption amount for tax year 2013 is $51,900 ($80,800, for married couples filing jointly), set by the act which indexes future amounts for inflation. The 2012 exemption amount was $50,600 ($78,750 for married couples filing jointly).
• The Act reinstated both the limitation on itemized deductions and the phase out on personal exemption.  Itemized deductions claimed on 2013 returns of individuals with incomes of $250,000 or more ($300,000 for married couples filing jointly) will be limited.  The exemption phase-out  begins with adjusted gross incomes of $150,000 ($300,000 for married couples filing jointly). It phases out completely at $211,250 ($422,500 for married couples filing jointly.)
• The Act extended following through 2013: Exclusion of cancellation of debt income on qualified principal residence indebtedness, mortgage insurance premium treated as mortgage interest deductions, tax free distributions from IRA for charitable purposes, above the line deduction for qualified tuition expenses, deduction of state and local sales taxes, energy related tax credits and bonus depreciation.

There are at least three additional tax increases noteworthy in 2013, even though not a part of the American Tax Relief Act of 2012.  All individuals will now pay an additional 2% (for a total amount of 6.2%) in payroll taxes (Social Security taxes) on their income up to $113,700 as Congress chose not to extend the “payroll tax holiday” that expired at the end of 2012.  Brand new two Medicare taxes were enacted by The Affordable Care Act of 2010.   A .9% Medicare Hospital Insurance tax will be assessed on any wages or small business income that exceed the thresholds $250,000 (married filing jointly), $200,000 (single filers), or $125,000 (married filing separately).   For individuals in these same categories, a new 3.8% Medicare surtax on the lesser of certain types of investment income or adjusted gross income will also be assessed.

With all these new tax law changes, a lot has to be explored and researched as the tax code is becoming more and more complex.

About the Author:  
Ami Shah ACA, CPA, Ms in Taxation is a licensed CPA and Chartered Accountant with nearly 15 years of professional experience.  Her CPA firm in San Jose provides tax and accounting services to small businesses and individuals.