On January 2, President Obama signed the "American Taxpayer Relief Act of 2012" (ATRA) into law. Actually, because he was in Hawaii, he signed it using an autopen (for you trivia buffs), which is a device that replicates his signature. The law averted the so-called "Fiscal Cliff" and prevented the expiration of many of the tax provisions put in place during the Bush administration. Here is a summary of some of the changes included in the new tax law that may affect you:
- Income tax rates for most individuals will remain unchanged. However, a 39.6% rate will apply to high-income taxpayers with income above a threshold of $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married taxpayers filing separately.
- Tax on capital gains and dividends has changed for years beginning after 2012. The tax rate will be 20% for taxpayers with income above the thresholds defined above and will be 15% for others (0% for taxpayers in tax brackets below 25%.) In addition, the 3.8% investment surtax will apply to individuals with modified adjusted gross income (MAGI) in excess of $250,000 for joint filers ($200,000 for single and head of household). Note that the threshold triggering the 3.8% remains the same as it did before January 1—and it is lower than the income tax rate thresholds mentioned above.
- Marriage penalty relief has been reinstated. The size of the 15% tax bracket for joint filers and qualified surviving spouses remains at 200% of the 15% tax bracket for individual filers.
- Personal exemptions did not phase out, except for higher-income taxpayers. The starting threshold for phase-out is $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married taxpayers filing separately.
- The "Pease" limitation on itemized deductions has been reinstated for 2013. Certain itemized deductions are reduced by 3% of the amount by which the taxpayer's adjusted gross income exceeds the same thresholds used for the personal exemption phase-out.
- The Alternative Minimum Tax relief has been extended and made permanent. The AMT exemption amounts have been increased and will be indexed for inflation.
- For estates of decedents dying after December 31, 2012, the maximum federal estate tax rate increases to 40% with a $5 million exclusion that will be adjusted annually for inflation. "Portability" between spouses has been made permanent.
- The exclusion for discharged home mortgage debt has been extended for one year through 2013.
- The treatment of mortgage insurance premiums as deductible qualified residence interest has been reinstated and extended through 2013.
- The state and local sales tax deduction has been reinstated and extended through 2013. This deduction is in lieu of state and local income taxes.
- The American Opportunity Tax Credit for qualified tuition and related expenses has been extended for five years.
- The above-the-line deduction for higher education expenses has been reinstated and extended so it can be claimed for tax years beginning before Janurary 1, 2014.
- The provision to allow nontaxable IRA transfers up to $100,000 to eligible charities has been reinstated and extended for two years so that it's available for charitable IRA transfers made in tax years beginning before January 1, 2014. Two tax elections are available to allow the retroactive application of this provision to 2012; however, you must act before the end of January 2013.
There are numerous additional provisions included in the new tax law. Please contact your BerryDunn advisor to discuss how the new tax law will affect you, your family, and your business.
For details about how the tax changes may affect your business, see our related article here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.