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The American Taxpayer Relief Act

Posted by McDonald & Osborne Posted on Oct 13 2015

In the early morning hours of January 1, 2013, the “fiscal cliff” stalemate finally broke and the Senate passed H.R. 8 the “American Taxpayer Relief Act.” Later on that same day, a weary House of Representatives also passed the bill. Signed into law by President Obama on January 3 rd , the 2012 Taxpayer Relief Act retains many of the credits and tax breaks that were scheduled to expire at year end and prevents many of the tax increases that made economists coin the term “fiscal cliff.” However, the law also increases income taxes for many high-income taxpayers as well as increasing the estate and gift tax rates. Read on and get the scoop on the tax changes for individuals in 2013 and beyond.

  • The top income tax bracket of 35% jumps to 39.6% for individuals with $400,000 in income and for married couples filing jointly with $450,000 in income.

  • The payroll tax reduction was not renewed so social security tax on wages will increase by 2%. In addition, the employee portion of the 1.45% Medicare tax on wages is increased by an additional .9% on wages that exceed $250,000 for joint filers.

  • Dividends and capital gains will be taxed at 20% for joint filers making at least $450,000 plus the 3.8% healthcare surtax on investment income. For those with adjusted gross income under the $400,000/$450,000 levels the capital gains rate is permanently set at 15%.

  • The healthcare surtax is on investment income which is generally classified as capital gains dividends, interest, annuity payments, net gains from the disposition of a property, other than such income derived in the ordinary course of business, royalties and rents. The surtax will generally apply to joint filers with combined gross income greater than $250,000. So married couples with more than $450,000 will pay capital gains and dividend tax rates of 23.8%.
  • The personal exemption phase out was reinstated with a starting threshold of $250,000 for individuals, $275,000 for heads of household and $300,000 for joint filers. This means the total amount of the exemption that can be claimed is reduced by 2% for each $2,500 by which the adjusted gross income exceeds the $300,000. For 2013 the base personal exemption amount is $3,900.

  • The itemized deduction limitation was reinstated with a threshold of $250,000 for individuals, $275,000 for heads of household and $300,000 for joint filers. This means that the total amount of the itemized deductions is reduced by 3% of the amount by which the adjusted gross income exceeds the threshold amount. The reduction is not to exceed 80% of the otherwise allowable itemized deductions which include real estate taxes, mortgage interest and charitable contributions. Stated another way, high income taxpayers could lose up to, but not more than, 80% of their itemized deductions.

  • The 7.5% threshold for medical care itemized deductions was increased to 10% of adjusted gross income unless the taxpayer or the taxpayer’s spouse has attained the age of 65 in the applicable tax year.

  • The educator expense deduction that allows elementary and secondary school teachers to claim a deduction for up to $250 per year of expenses paid for books, supplies and other supplementary materials used in the classroom is retroactively reinstated for two years so that it applies to expenses paid in 2012 & 2013.

  • The provision to exclude from income the discharge of indebtedness from qualified principal residence debt up to a $2 million limit is extended for one year so that it applies to debt discharged before 2014.

  • The provision to treat mortgage insurance premiums as deductible qualified residence interest is retroactively extended for two years so that mortgage insurance premiums paid before January 1, 2014 are deductible.

  • The election to deduct state and local general sales and use tax instead of state and local income tax is retroactively extended for two years. This allows the deductibility of state and local sales tax paid for tax years beginning before January 1, 2014.

  • The deduction for qualified tuition and related expenses for higher education is retroactively extended for two years so that a deduction can be claimed for years before January 1, 2014.

  • The provision for taxpayers who are age 70 ½ or older that allows them to make tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000 per year is retroactively extended for two years. It is available for charitable IRA transfers made in tax years beginning before January 1, 2014.

  • The higher exemption amount for the Alternative Minimum Tax – the “AMT Patch” – has been made permanent and the annual exemption amounts will be adjusted for inflation after 2012.

  • The estate, gift and generation skipping tax exemption amount is $5 million per person or $10 million per couple. Portability of the exemption between spouses has been permanently extended. The maximum estate tax rate is permanently increased from 35% to 40%.

  • There is a 5 year extension of the child tax credit, the opportunity tax credit (education tax incentives), and the earned income tax credit.

If you have any questions regarding the American Taxpayer Relief Act and how its tax implications may affect you, please contact our office.

Angela Krape, CPA

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