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Focus on Taxation: American Taxpayer Relief Act

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On January 1, 2013, the Senate and House of Representatives passed the American Taxpayer Relief Act ("Act"). The President signed the Act into law on January 2, 2013. The summary below has been prepared by RubinBrown tax executives to highlight many of the implications of this legislation.
January 2, 2013

On January 1, 2013, the Senate and House of Representatives passed the American Taxpayer Relief Act ("Act"). The President signed the Act into law on January 2, 2013. The summary below has been prepared by RubinBrown tax executives to highlight many of the implications of this legislation.

INDIVIDUALS

Income Tax Rates

  • For tax years beginning after December 31, 2012, income tax rates will remain at 10%, 15%, 25%, 28%, 33% and 35%
  • An additional 39.6% rate will apply for taxable income above certain thresholds>/li> >ul>
  • The thresholds are $450,000 for married filing jointly and surviving spouse filers, $425,000 for head of household filers, $400,000 for single filers and $225,000 for married filing separately filers>/li>
  • These thresholds will be adjusted for inflation after 2013

Capital Gain and Dividend Tax Rates

  • For tax years beginning after December 31, 2012, the top rate for long-term capital gains and qualified dividends will rise to 20% (up from 15%) before the surtax described below for taxpayers with taxable income above certain thresholds
    • The thresholds are $450,000 for married filing jointly and surviving spouse filers, $425,000 for head of household filers, $400,000 for single filers and $225,000 for married filing separately filers
    • These thresholds will be adjusted for inflation after 2013
  • For taxpayers whose ordinary income is generally taxed at a rate below 25%, long-term capital gains and qualified dividends will be subject to a 0% rate
  • Taxpayers who are subject to a 25% or greater rate on ordinary income, but whose income level falls below the above thresholds, will continue to be taxed at a 15% rate on long-term capital gains and qualified dividends
  • It should be noted that the 3.8% surtax on net investment income introduced by the Patient Protection and Affordable Care Act still applies to net investment income for certain taxpayers
  • The top rate for long-term capital gains and qualified dividends will be 23.8% when the surtax is included
  • Short-term captial gains will continue to be taxed at the taxpaery's ordinary income tax rate.

Limitation on Itemized Deductions

  • For tax years beginning after December 31, 2012, itemized deductions will be limited for taxpayers with adjusted gross income (AGI) above certain thresholds
    • The thresholds are $300,000 for married filing jointly and surviving spouse filers, $275,000 for head of household filers, $250,000 for single filers and $150,000 for married filing separately filers
    • These thresholds will be adjusted for inflation after 2013
  • For taxpayers subject to this “Pease” limitation, the total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer’s AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions

Limitation on Personal Exemptions

  • For tax years beginning after December 31, 2012, personal exemptions will be phased out for taxpayers with AGI above certain thresholds
    • The thresholds are $300,000 for married filing jointly and surviving spouse filers, $275,000 for head of household filers, $250,000 for single filers and $150,000 for married filing separately filers
    • These thresholds will be adjusted for inflation after 2013
  • For taxpayers subject to this “Personal Exemption Phaseout,” the total amount of personal exemptions is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer’s AGI exceeds the applicable threshold until reduced to zero

Alternative Minimum Tax (AMT)

  • The Act provides permanent AMT relief
  • The AMT is the excess, if any, of the tentative minimum tax for the year over the regular tax for the year
    • In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount (which phases out at higher income levels)
    • The result is alternative minimum taxable income, which is subject to an AMT rate of 26% or 28%
  • The Act changes the amounts of the AMT exemption
  • The AMT exemption amounts for 2012 have retroactively been increased to $78,750 for married filing jointly and surviving spouse filers, $50,600 for single and head of household filers and $39,375 for married filing separately filers
  • These exemption amounts will be adjusted for inflation after 2012
  • In addition, the Act permanently allows a taxpayer to offset their entire regular tax liability and AMT liability by the total of their nonrefundable personal credits

Extended 2012 through 2013

  • The deduction for certain expenses of elementary and secondary school teachers
  • The exclusion for discharge of qualified principal residence indebtedness
  • Parity for the exclusions for employer-provided mass transit and parking benefits
  • The treatment of mortgage insurance premiums as qualified residence interest
  • The option to deduct state and local general sales tax
  • The special rule for contributions of capital gain real property made for conservation purposes
  • The above-the-line deduction for qualified tuition and related expenses
  • Tax-free distributions from individual retirement plans for charitable purposes

Extended 2013 through 2017

  • The American Opportunity tax credit, which permits eligible taxpayers to claim a credit equal to 100% of the first $2,000 of qualified tuition and related expenses, and 25% of the next $2,000 of qualified and related expenses (for a maximum credit of $2,500 for the first four years of post-secondary education)
  • Eased rules for qualifying for the refundable child credit
  • Various earned income tax credit changes

Payroll Tax Cut Not Extended

  • The temporary reduction in the employee portion of the FICA rate expired December 31, 2012 and was not extended
  • The rate for the employee share of FICA will revert to 6.2% (up from 4.2%) on wages up to $113,700 in 2013
  • The rate for the FICA portion of self-employment income will revert to 12.4% (up from 10.4%) on self employment income up to $113,700 in 2013

Pension Provision

  • For transfers after December 31, 2012, in tax years ending after that date, plan provisions in an applicable retirement plan (including qualified Roth contribution programs) can allow participants to elect to transfer amounts to designated Roth accounts with the transfer being treated as a taxable qualified rollover contribution

ESTATE & GIFT TAXES

For individuals dying and gifts made after 2012

  • Exemption level permanently set at $5,000,000 (to be indexed for inflation after 2013)
  • Top tax rate increases from 35% to 40%
  • Continues portability feature that allows the estate of the first spouse to die to transfer his or her unused exemption to the surviving spouse

BUSINESSES

Depreciation Provisions

  • 50% bonus depreciation applicable for new property placed in service after December 31, 2012 and before January 1, 2014
  • The election to accelerate the AMT and research credits in lieu of bonus depreciation has been extended through 2013
  • 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements has been extended through 2014
  • Increased Code Section 179 expensing limitations ($500,000 with a $2,000,000 investment limit) has been extended through 2014
  • Treatment of certain real property as Code Section 179 property has been extended through 2014

Extended 2012 through 2013

  • Research tax credit (code section 41)
  • Employer wage credit for employees who are active duty members of the uniformed services (code section 45P)
  • Various empowerment zone tax incentives
  • Work opportunity tax credit (code section 51)
  • Enhanced charitable deduction for contributions of food inventory (code section 174(e))
  • Allowance of domestic production activities deduction for activities in Puerto Rico
  • Exclusion from a tax-exempt organization’s unrelated business taxable income of interest, rent, royalties and annuities paid to it from a controlled entity (code section 512(b)(13)(E)(iv))
  • Exception under subpart F for active financing income (code sections 953(e)(10) and 954(h)(9))
  • Look-through treatment for payments between related controlled foreign corporations under the foreign personal holding company rules (code section 954(c)(6))
  • Exclusion of 100% of gain on certain small business stock acquired before January 1, 2014
  • Basis adjustment to stock of S corporations making charitable contributions of property (code section 1367(a))
  • The S corporation recognition period for built-in gains tax remains 5 years (code section 1374(d)(7))

ENERGY-RELATED TAX BREAKS

Extended through 2013

  • Nonbusiness energy property credit for energy-efficient existing homes (code section 25C)
  • Alternative fuel vehicle refueling property credit (code section 30C)
  • Credit for two or three wheeled plug-in electric vehicles (code section 30D)
  • Cellulosic biofuel credit (code section 40(b))
  • Credit for biodiesel and renewable diesel (code section 40A)
  • Credits with respect to facilities producing energy from certain renewable resources (code section 45)
  • Credit for energy-efficient new homes (code section 45L)
  • Credit for energy-efficient appliances (code section 45M)
  • Special rule for sales or dispositions to implement Federal Energy Regulatory Commission or State electric restructuring policy for qualified electric utilities

RubinBrown is committed to keeping our clients informed on legislative changes as they occur. Look for updates in 2013 as many “fiscal cliff” issues remain unresolved.

 

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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