By Tom Judge
In the waning hours of January 1, Congress passed the American Taxpayer Relief Act (ATRA) of 2012 as part of an effort to resolve the fiscal cliff dilemma. President Obama signed the Act into law on January 2. As a result of ATRA, your taxes will be lower for 2013 than what they would otherwise have been without the new law. The law also extended, and in some cases made permanent, certain deductions that had expired in 2011, which if applicable to your situation, may also decrease your taxes for 2012.
Probably the most important provision in the new law is the permanent extension of lower tax rates for low, middle, and upper-middle income taxpayers for 2013 and later years. The 10 percent (i.e., lowest) individual income tax bracket that was scheduled to expire at the end of 2012, has been permanently extended. The 25, 28, 33, and 35 percent individual income tax brackets that were also scheduled to expire at the end of 2012 have been permanently extended. Higher tax rates apply to taxpayers with adjusted gross income above certain amounts (i.e., $400,000 for individual filers, $425,000 for heads of households, $450,000 for married taxpayers filing jointly, and $225,000 for married filing separately status). The top tax rate is 39.6 percent.
Another key provision is the extension of lower capital gain rates for most taxpayers. For 2013, the capital gains and dividend rates for taxpayers below the 25 percent bracket continues to be zero percent. For those in the 25 percent bracket, the capital gains and dividend rates continue to be 15 percent. For higher income taxpayers, the rate is increased to 20 percent. As under prior law, higher rates apply to gain or loss from the sale of collectibles and the eligible gain from the sale of qualified small business stock, as well as unrecaptured Section 1250 gain, regardless of the taxpayer’s tax bracket.
The following are some of the more significant changes under the new tax law that may affect you:
Permanent AMT Relief
ATRA increases the alternative minimum tax (AMT) exemption amounts for 2012 to $50,600 (individuals), $78,750 (married filing jointly), and $39,375 (married filing separately). These amounts are substantially higher than the exemption amounts that were scheduled to be in effect for 2012. Thus, many individuals that might have been subject to the AMT for 2012 will escape the additional tax imposed by the AMT. However, these exemptions continue to phase-out for alternative minimum taxable income over certain amounts. In addition, ATRA indexes the exemption and phase-out amounts for years after 2012 and allows nonrefundable personal credits to reduce AMT.
Permanent Repeal of Personal Exemption Phase-out
Under the personal exemption phase-out (PEP), personal exemptions are phased out for taxpayers with adjusted gross income (AGI) above a certain level. Previous legislation temporarily repealed the PEP through 2012. ATRA permanently extends the repeal of the PEP on incomes at or below $250,000 (individual filers), $275,000 (heads of households) and $300,000 (married filing jointly), and $150,000 (married filing separately) for tax years beginning after December 31, 2012.
Permanent Repeal of Deductions Limitation
Generally, taxpayers itemize deductions if their total deductions are more than the standard deduction amount. Under prior law, the amount of itemized deductions a taxpayer could claim was reduced to the extent the taxpayer’s AGI was above a certain amount. This rule was temporarily repealed for itemized deductions through 2012. ATRA permanently extends the repeal of the deduction limitation on incomes at or below $250,000 (individual filers), $275,000 (heads of households), $300,000 (married filing jointly), and $150,000 (married filing separately) for tax years beginning after December 31, 2012.
Modifications to Estate Tax; Portability Made Permanent
Legislation enacted in 2001 phased out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. Legislation enacted in 2010 set the exemption at $5 million per person with a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount was indexed beginning in 2012. ATRA makes permanent the indexed exclusion amount and indexes that amount for inflation going forward, but sets the top tax rate at 40 percent for estates of decedents dying after December 31, 2012. The exclusion is $5,120,000 and $5,250,000 for 2012 and 2013, respectively.
ATRA also permanently extends unification of the estate and gift taxes and makes permanent the provision that allowed the executor of a deceased spouse’s estate to transfer any unused exemption amount to the surviving spouse.
Extension of Deduction for Expenses of Elementary and Secondary School Teachers
The rule that allowed elementary and secondary school teachers to deduct from gross income up to $250 of qualified expenses they paid during the year ($500 on a joint return if both spouses were eligible educators) expired for tax years beginning after 2011. ATRA extends the deduction through tax years beginning before 2014.
Extension of Exclusion of Income from Discharge of Qualified Principal Residence Indebtedness
For certain tax years before 2013, taxpayers could exclude from income the discharge of qualified principal residence debt. This provision was scheduled to expire for debt discharged after December 31, 2012. ATRA extends the exclusion to debt that is discharged before January 1, 2014.
Extension of Parity for Exclusion for Employer-Provided Transportation Benefits
The value of employer-provided qualified transportation benefits (such as transportation in a commuter highway vehicle between home and work, transit passes, and qualified parking) is excludable from the employee’s gross income to the extent the value does not exceed certain dollar limitations. In recent years, the maximum monthly excludable amount for combined employer-provided transit passes and vanpool benefits was equal to the maximum for employer-provided parking. This parity in qualified transportation fringe benefits expired January 1, 2012, so that effective January 1, 2012, the amount that could be excluded as qualified transportation fringe benefits was limited to $125 a month in combined transit pass and vanpool benefits and $240 a month in qualified parking benefits. ATRA extends the parity in qualified transportation fringe benefits through December 31, 2013. Thus, for 2012, the monthly limit on the exclusion from gross income for combined transit pass and vanpool benefits is $240.
Extension of Mortgage Insurance Premiums Treated as Qualified Residence Interest
A taxpayers’ ability to treat qualified mortgage insurance as qualified residence interest expired for amounts paid or accrued after December 31, 2011, or for amounts properly allocable to any period after that date. ATRA extends this treatment to amounts paid or accrued before January 1, 2014 (and not properly allocable to any period after 2013).
Extension of State and Local General Sales Taxes Deduction
The election to deduct state and local general sales taxes (instead of state and local income taxes) as an itemized deduction had expired for tax years beginning after December 31, 2011. ATRA extends the availability of that election to tax years beginning before January 1, 2014.
Extension of Above-the-Line Deduction for Qualified Tuition and Related Expenses
For years before 2012, taxpayers with modified adjusted gross income below certain thresholds could deduct up to $4,000 of qualified education expenses paid during the year for themselves, their spouses, or their dependents. The maximum deduction was $4,000 for an individual whose adjusted gross income for the tax year did not exceed $65,000 ($130,000 in the case of a joint return), or $2,000 for other individuals whose adjusted gross income did not exceed $80,000 ($160,000 in the case of a joint return). ATRA extends the availability of the deduction to tax years beginning before January 1, 2014.
Extension of Student Loan Interest Deduction
Taxpayers with modified adjusted gross income below certain thresholds may deduct up to $2,500 of interest paid on a qualified student loan in computing adjusted gross income. This provision was scheduled to be repealed and replaced with a less generous provision for tax years beginning after 2012. However, ATRA extends permanently the up-to-$2,500 deduction rule.
Extension of Credit for Energy-Efficient Existing Homes
A taxpayer is allowed a 10-percent nonbusiness energy property credit for the purchase of qualified energy efficiency improvements to existing homes. Additionally, a taxpayer can claim specified credits for the purchase of specific energy efficient property originally placed in service by the taxpayer during the tax year. There is a lifetime limitation of $500 on the total amount of nonbusiness energy property credit that may be claimed. There are also dollar limitations on the amount of the credit that may be claimed for specific types of qualified energy efficiency improvements and residential energy property. This credit expired for any property placed in service after December 31, 2011. ATRA extends the availability of the credit to property placed in service before January 1, 2014.
Extension of Credit for Two- or Three-Wheeled Plug-in Electric Vehicles
ATRA reforms and extends for two years, 2012 and 2013, the individual income tax credit for highway-capable plug-in motorcycles and three-wheeled vehicles.
Extension of American Opportunity Tax Credit
ATRA also extended the American Opportunity tax credit for five years through 2018. A taxpayer who pays qualified education expenses may elect to claim an American opportunity tax credit of up to $2,500 per year for each eligible student. The amount of the credit for each student is computed as 100 percent of the first $2,000 of qualified education expenses paid for the student and 25 percent of the next $2,000 of such expenses paid.
Child Tax Credit
The child tax credit was scheduled to be reduced from $1,000 to $500 in 2013. ATRA makes the $1,000 child tax credit permanent and extends for five years certain modifications relating to the additional child tax credit that will enable more individuals to claim the credit.
Earned Income Tax Credit
Working families with two or more children currently qualify for an earned income tax credit equal to 40 percent of the family’s first $12,570 of earned income. Prior law increased that percentage to 45 percent for families with three or more children for tax years through 2012. ARTA extends the 45 percent rate for such families through 2017. ARTA also increases the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children) to lessen the marriage penalty.
Marriage Tax Penalty Relief
ATRA permanently extends marriage tax penalty relief for the standard deduction, the 15 percent bracket, and the earned income tax credit for tax years beginning after December 31, 2012.
Extension of Emergency Unemployment Compensation Program and Extended Benefit Provisions
ATRA extends for one year the availability of benefits in all tiers of Federal Emergency Unemployment Compensation, and provides for a continuation of unemployment benefits for railroad workers for one year.