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William Perez

House Approves the American Taxpayer Relief Act of 2012

By January 2, 2013

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On January 1, 2013, the House of Representatives voted in favor of the American Taxpayer Relief Act of 2012 (H.R. 8). This bill now goes to the President for signature before becoming enacted. The House passed the American Taxpayer Relief Act (ATRA) with 257 Representatives voting in favor and 167 voting against (Roll Call 659). Earlier in the day, the Senate approved ATRA with 89 Senators voting in favor and 8 voting against (Roll Call 251). The House did not change any of the proposals from the Senate's amendment.

ATRA permanently extends 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. Some tax provisions, however, are extended only temporarily.

The following is a very brief summary of the tax provisions impacting individuals.

Individual Income Tax Rates

ATRA permanently retains the  10%, 15%, 25%, 28%, and 33% income tax brackets. The 35% tax bracket ends at $400,000 for single filers. Above this threshold, there's a new 39.6% tax bracket. Thresholds for the new 39.6% bracket for 2013 will be

  • 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, and
  • Married Filing Separately: $225,000 of taxable income.

ATRA permanently retains the 0% and 15% tax rates on qualified dividends and long-term capital gains, and adds a new 20% tax rate that would apply to taxpayers who fall within the new 39.6% tax bracket. Which capital gains tax rate will apply depends on what tax bracket a person is in. The new capital gains tax rates for 2013 and future years will be

  • 0% applies to capital gains income if a person is in the 10% and 15% tax brackets,
  • 15% applies to capital gains income if a person is in the 25%, 28%, 33%, or 35% tax brackets, and
  • 20% applies to capital gain income if a person is in the 39.6% tax bracket.

Alternative Minimum Tax

ATRA provides the following AMT exemption amounts for 2012, and provides that these amounts will be indexed for inflation annually:

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

Estate Tax Rates

ATRA permanently extends the $5 million exclusion, indexed to inflation,  and unified exemption amount with portability. The new  top tax rate for estates is 40%.

Limitations on Deductions

Itemized deductions will be limited. The total amount of itemized deductions that are allowable as a deduction will 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 threshold amounts at which itemized deductions would start to be reduced 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.

Similarly, personal exemptions will be limited. 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 threshold amounts at which personal exemptions would start to be reduced are the same as for itemized deductions, namely:

  • 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.

Other Individual Tax Deductions

  • The student loan interest deduction is permanently extended. ATRA eliminates the rule that the deduction can be claimed only during the first 60 months of repayment.
  • The classroom expenses deduction of up to $250 is temporarily extended through the end of 2013.
  • Mortgage insurance premiums will continue to be deductible as part of the mortgage interest deduction through the end of 2013.
  • The sales taxes deduction, in lieu of a deduction for state income taxes, is temporarily extended through the end of 2013.
  • The charitable deduction for contributing real property for qualified conservation purposes is temporarily extended through the end of 2013.
  • The above-the-line tuition and fees deduction is temporarily extended through the end of 2013.

Various Individual Tax Credits

  • The child tax credit remains unchanged and is permanently extended. The maximum amount of the child tax credit is $1,000, and the credit is partially refundable. However, the provision the reduces the earnings threshold for the refundable portion of the child tax credit to $3,000 will expire at the end of 2017.
  • The dependent care tax credit remains unchanged and is permanently extended. Daycare expenses up to $3,000 for one child and $6,000 for two or more children qualify for the tax credit, and these amounts are not indexed for inflation.
  • The adoption credit is permanently extended. The credit is worth up to $10,000 (indexed for inflation).
  • Also permanently extended is the earned income tax credit for families with three or more dependents.
  • The American opportunity tax credit is extended temporarily through the end of 2017.

Tax-Advantaged Savings Accounts

  • ATRA permanently extends the $2,000 annual contribution limit to Coverdell Education Savings Accounts.
  • The tax-free charitable distribution from IRAs of up to $100,000 per year is temporarily extended through the end of 2013. ATRA provides rules for handling IRA distributions made in December 2012 and January 2013 so as to enable IRA beneficiaries to make charitable distributions for the 2012 tax year.

Employee Benefits

  • Employer provided educational assistance is permanently extended. Employers are permitted to reimburse employees for undergraduate and graduate level courses.
  • Mass transit and parking benefits set at maximum of $240 per month, which is temporarily extended through the end of 2013. As YK in NY noted in the comments below, the amount set for tax-free reimbursement of mass transit and parking benefits is set at $240 per month for the year 2012, up from $230 a month in 2011.

Exclusions from Income

  • National Health Service Corps Scholarship program and F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program are granted permanent tax-free status for recipients.
  • Alaska Native Settlement Trusts are permitted to tax income to the Trust and not to the beneficiaries, a provision made permanent by ATRA.
  • Federal tax refunds are now permanently disregarded in determining income and asset eligibility factors for federal assistance programs.
  • The tax-free exclusion for cancellation of debt income relating to a principal residence is temporarily extended through the end of 2013.

This list of tax changes in the American Taxpayer Relief Act is not comprehensive. There are further provisions covering business deductions, business credits, and energy tax incentives.

Resources:

 

Comments
January 2, 2013 at 8:27 pm
(1) Cr in NY says:

William,

Thanks for such a great article that so nicely distills and articulates the Taxpayer Relief Act of 2012.

What happened the old “Super Long Term Capital Gains Rate” of 18% for securities held over 5 years? Does the 39.5% bracket have that or was it overwritten by the 20% rate?

Also what happens if a taxpayer has more than $400,000/ $450,000 in combined ordinary and cap gain income- but less than $400,000/ $450,000 in cap gains alone. Would the cap gains tax be a blended rate or would every dollar of cap gains be taxed at the higher level?

Again- thanks for a great article.

Cr

January 7, 2013 at 11:50 am
(2) YK in NJ says:

Great article!

However, this paragraph should be corrected:
> Mass transit and parking benefits set at maximum of $175 per
month, which is temporarily extended through the end of 2013. ”

The American Taxpayer Relief Act of 2012 states:
“SEC. 203. EXTENSION OF PARITY FOR EXCLUSION FROM INCOME FOR EMPLOYER-PROVIDED MASS TRANSIT AND PARKING BENEFITS.
(a) IN GENERAL.—Paragraph (2) of section 132(f) is amended by striking ‘‘January 1, 2012’’ and inserting ‘‘January 1, 2014’’. ”

This limit was earlier $230 – by The American Recovery and Reinvestment Act temporarily (March 1, 2009 through December 31, 2010) which increased the monthly transit pass/vanpool limit to equal the monthly parking limit.
Later, The Tax Relief, Unemployment Insurance Reauthorization,
and Job Creation Act of 2010 extended this provision through 2011.

So, the correct amount now is
- $240 for parking and
- $240 for mass transit

January 8, 2013 at 12:18 am
(3) William Perez says:

Thank you, YK in NY, for bringing this to my attention. I have corrected my article to reflect the $240 amount.

January 10, 2013 at 2:22 pm
(4) Steven Bartlett says:

This article states that some credits were permanently extended but the white house link says they were only extended for 5 years.

March 24, 2013 at 5:18 pm
(5) JN says:

Such a helpful article. It gave me the information I needed to prove to my tax preparer that I can deduct my sales tax on my Federal return. Wyoming has no state income tax so it is very helpful. Thank you. This was the only article that didn’t give me the runaround to other for money sites.

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