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Senate Approves the American Taxpayer Relief Act of 2012

By January 1, 2013

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The Senate on January 1, 2013, voted in favor of the American Taxpayer Relief Act of 2012, a revised version of HR 8 which the House of Representatives had written and approved. The revised HR 8 now goes back to the House for consideration.

The Senate's revised HR 8 bill proposes to extend permanently a number of tax provisions that had already expired at the end of 2011 and 2012, revises tax rates on ordinary and capital gain income, modifies the estate tax, and extends unemployment benefits, Medicare payments and farm subsidies. This article discusses the individual tax provisions only.

Individual Income Tax Rates on Ordinary Income

Starting in 2013, the 10%, 15%, 25%, 28%, 33% and 35% tax brackets would remain in place. There would be a new 39.6% rate, which would begin at the following thresholds:

  • Married Filing Jointly: $450,000 of taxable income
  • Qualifying Widow(er):  $450,000 of taxable income
  • Head of Household: $425,000 of taxable income
  • Single: $400,000 of taxable income
  • Married Filing Separately: $225,000 of taxable income

Tax Rates on Long-Term Capital Gains

The Senate version of HR 8 retains the zero percent tax rate on long-term gains, modifies the 15% rate, and proposes a new 20% rate. Starting in 2013 the tax rates on long-term gains would be:

  • 0% if income falls below the 25% tax bracket
  • 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate
  • 20% if income falls in the 39.6% tax bracket

Alternative Minimum Tax

The Senate proposes the following AMT exemption amounts for 2012:

  • Married Filing Jointly: $78,750
  • Qualifying Widow(er): $78,750
  • Single: $50,600
  • Head of Household: $50,600
  • Married Filing Separately: $39,375

The Senate also proposes that these amounts be indexed for inflation after 2012.

Limitations on Itemized Deductions

Also called the Pease limitations, the Senate proposes that limitations on the total amount of itemized deductions be re-instated for 2013. Itemized deductions would be reduced by the lesser of 3% of the taxpayer's adjusted gross income (AGI) over the threshold amount or by 80% of otherwise allowable itemized deductions. The proposed threshold amounts at which itemized deductions would start to be limited are:

  • Married Filing Jointly: $300,000 of AGI
  • Qualifying Widow(er): $300,000 of AGI
  • Head of Household: $275,000 of AGI
  • Single: $250,000 of AGI
  • Married Filing Separately: $150,000 of AGI

These threshold amounts would be indexed for inflation for years after 2013.

Limitations on Personal Exemptions

The Senate proposes to re-instate the personal exemption phase-out (also called PEP), starting in 2013. Taxpayers would see their total personal exemptions reduced by two percent for each $2,500 (or fraction thereof) by which adjusted gross income exceeds the threshold. The proposed threshold amounts for 2013:

  • Married Filing Jointly: $300,000 of AGI
  • Qualifying Widow(er): $300,000 of AGI
  • Head of Household: $275,000 of AGI
  • Single: $250,000 of AGI
  • Married Filing Separately: $150,000 of AGI

These threshold amounts would be indexed for inflation for years after 2013.

Deductions, Credits, and Income Exclusions

The Senate proposes that the following tax provisions be extended through the end of the year 2017:

  • American Opportunity Credit
  • Child Tax Credit at $1,000 maximum and partially refundable
  • Earned Income Credit for 3 or more dependents

The following provisions would be extended through the end of 2013:

  • Educator expenses deduction
  • Exclusion for cancellation of debt on primary residences
  • Mass transit and parking benefits excluded from income set at maximum of $175 per month.
  • Mortgage insurance premium deduction
  • Deduction for state and local sales taxes
  • Charitable deduction for donating real property for conservation purposes
  • Tuition and fees deduction
  • Exclusion for chartiable distributions from individual retirement accounts

Resources

Full text of H.R. 8 from Thomas. PDF versions are also available via the Government Printing Office, Politico, and Business Insider.

News reports: The Hill, the New York Times, and Accounting Today.

Comments
January 1, 2013 at 9:43 pm
(1) Lois E. Turnbow says:

Honorable Patty Murry,
I am so displeased in the bill that that the president caved in on. the money was changed from two hundred and fifty thousand to four hundred thousand for a single person. Shame on him.

January 2, 2013 at 8:01 am
(2) John G. says:

It’s called “compromise” and is a whole lot better than the “flat-tax” that Republicans are pushing for.

January 2, 2013 at 8:52 am
(3) Janine says:

One of the best articles out there with a breakdown of changes and extentions. I have to agree: This compromise won’t make everyone happy.

January 2, 2013 at 8:58 am
(4) able smith says:

450K is very reasonable. 2 working professionals without kids easily hit the 250K mark but get clobbered by taxes if that is the cutoff.
The problem has been the total unwillingness of fanatical republicans to compromise. Compromise means you get something and you give something with nobody happy but everything works.

January 2, 2013 at 10:41 am
(5) Jack Meoff says:

Barack Hussein Obama: Read my name and get to work.

January 2, 2013 at 5:34 pm
(6) Ryan W says:

Nice summary. I am a CPA, working in tax. I’ve read the official tax act twice. Your article does a great job of summarizing the individual tax side of the act.

January 10, 2013 at 10:21 am
(7) Patricia says:

I’m a sinlge female earning $37,000. The increase in my tax deductions is $1,728.00. this increase at my level of is awful. It amouts to 21/2 months of rent. I’m not sure how I’ll make this up to meet my obligations each month, it puts me $144. short each month. I’m 62 so it’s going to be hard for me to get another job.

I thought Obama said the taxes would increase only on those making $250.000. I can’t believe anything he says anly longer. I’m outraged!
I was tricked into voting for him.

January 10, 2013 at 12:49 pm
(8) pat says:

Dear Patricia — You are not the only one that he tricked. Although, I didn’t vote for him, I have heard many people saying this. Just wait until he finds that way to confiscate everyone’s retirement accounts. Middle class will be gone completely..only the rich and poor.

January 29, 2013 at 7:15 pm
(9) bob says:

well pat don’t feel bad I am a husband and a father I have three children my wife makes pennies over minimum wage and I make enough to pay the bills we count on a decent refund every year and just found out our fabulous government reduced our tax credits and increased what we pay in !! LOL There is no middle class anymore we are all already broke!! at the rate this country is going I fear my children will be living in card board boxes!!!! I wish I knew the answer to our problems but of course if I did have it the government would come to my home and demand I never reveal it !!! its such a shame to watch this country fall apart because welfare recipients get to vote!!

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