American Taxpayer Relief Act of 2012 - Individuals
On January 2, 2013 President Obama signed the American Taxpayer Relief Act of 2012 (Act) which is intended to address some of the tax consequences of the "fiscal cliff". The Act permanently extends a large number of tax items from the 2001 and 2003 tax acts and other expired tax provisions. The following is a summary of the major tax provisions of the Act.
Major Provisions Affecting Individuals
Individual Tax Rates
Beginning in 2013, the individual marginal tax rates under current law are retained (10%, 15%, 25%, 28%, 33% and 35%) however a new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).
Phaseout of Itemized Deductions and Personal Exemptions
The Act reinstates the “phaseout” of personal exemptions and itemized deductions for single taxpayers with adjusted gross income (AGI) greater than $250,000, for heads of households with AGI greater than $275,000, and for married individuals filing jointly with AGI greater than $300,000 ($150,000 for each married spouse filing separately). The phaseout for personal exemptions is a reduction of 2% for each $2,500 by which the taxpayer’s AGI exceeds the threshold amount. The phaseout of itemized deductions is a reduction of 3% of the amount by which the taxpayer’s AGI exceeds the threshold amount but the reduction shall not exceed 80% of otherwise allowable deductions.
Capital Gains and Dividends
A new maximum rate of 20% applies to long term capital gains and qualified dividends for individuals who are subject to the new top income tax bracket. The current 15% rate is retained for taxpayers in the middle brackets (25% to 35%) and a 0% rate is retained for taxpayers in the 10% and 15% income tax brackets.
Alternative Minimum Tax
The AMT exemption amount for individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. The Act also permanently allows an individual to offset his or her entire regular tax liability and AMT liability by nonrefundable personal credits.
Estate and Gift Tax
The estate and gift tax exclusion amount remains at $5 million indexed for inflation ($5.12 million in 2012). The top estate and gift tax rate increases from 35% to 40% effective January 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the Act.
Permanent Extensions of Temporary Tax Provisions
The following are some of the various temporary tax provisions made permanent by the Act:
- Marriage penalty relief (i.e., the increased size of the 10% &15% rate bracket and increased standard deduction for married taxpayers filing jointly);
- The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one);
- The exclusion for employer-provided educational assistance;
- The higher contribution amount for Coverdell education savings accounts; and
- The employer-provided child care credit.
Individual Credits That Expired at the End of 2012
The American Opportunity Tax Credit for qualified tuition and other expenses of higher education was extended through 2018. Other credits that were extended for the same five-year period include enhanced provisions of the child tax credit and the earned income tax credit.
Extension of Individual Provisions That Expired at the End of 2011
The following are some of various individual tax provisions that expired at the end of 2011 that the Act extended through 2013:
- Tax-free distributions from individual retirement plans for charitable purposes;
- Deduction for certain expenses of elementary and secondary school teachers;
- Exclusion from gross income of discharge of qualified principal residence indebtedness;
- Mortgage insurance premiums treated as qualified residence interest;
- Deduction of state and local general sales taxes; and
- Above-the-line deduction for qualified tuition and related expenses
Read our update on the American Taxpayer Relief Act of 2012 - Business edition posting.
For additional relevant year-end information please visit our year-end planning page, where all useful updates are linked in one place.
For more information please contact the authors of this update, Barry D. Groebel and Mark R. Shellenberger.
Barry D. Groebel, CPA
Mark R. Shellenberger, CPA