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FFT News

FINANCIAL FOCUS

January 2013

AMERICAN TAXPAYER RELIEF ACT OF 2012 AND OTHER NEW TAX LAWS

In early January 2013, Congress passed and the President signed the American Taxpayer Relief Act of 2012, avoiding the “fiscal cliff” at the 13th hour. The Act allows tax rates to rise while also extending dozens of tax cuts for individuals and businesses. Specifically, the Act:
  • Raises the top tax rate to 39.6% for married couples with taxable income over $450,000 and single taxpayers with taxable income over $400,000. These amounts will be indexed for inflation.
  • Permanently extends the Bush-era income tax rates in effect in 2012 for all other taxpayers.
  • Raises long-term capital gains and qualifying dividends tax rate to 20% (from 15%) for taxpayers with taxable income over $450,000 (married) and $400,000 (single).
  • Patches the alternative minimum tax (AMT) for 2012 and permanently adjusts the exemption amount going forward.
  • Raises the maximum estate and gift tax rate to 40% (from 35%) but keeps the exemption amount at $5 million, adjusted for inflation. The portability feature continues.
  • Reinstates the phase out of personal exemptions and the overall limitation on itemized deductions for married couples filing jointly earning over $300,000 and single taxpayers earning over $250,000.
  • Extends for 5 years the American Opportunity Tax Credit to pay for higher education, the eased rules for the refundable child credit, and increased percentages for the earned income tax credit.
  • Extends through 2013 the following benefits: above-the-line deductions for teacher expenses, qualified education expenses, and tax-free distributions from IRA accounts for charitable purposes; election to deduct state and local sales taxes in lieu of income taxes; energy efficient tax credit for homes; the $500,000 Section 179 asset expensing; and 50% bonus deprecation.
  •  Other changes that took effect on January 1, 2013:
  • The employee portion of the payroll tax reverts back to pre-2011 levels, increasing 2% on wages up to $113,700.
  •  A new surtax is imposed at the rate of 3.8% on unearned income for taxpayers with “net investment income” in excess of $250,000 (married) and $200,000 (single).
  •  A new 0.9% additional Medicare tax is imposed on wages for taxpayers earning over $250,000 (married) and $200,000 (single).