Congress Passes Individual and Business Income Tax Relief and Extensions for 2013

January 7, 2013
Legal Updates

Following is a summary of the recent American Taxpayer Relief Act of 2012 (the "Bill") that addresses many tax increases that would have automatically gone into effect at the end of 2012 due to the scheduled expiration of Bush-era tax cuts.  In addition, the Bill also provides extensions and increases in tax credits and deductions that were scheduled to expire at the end of 2012. 

Individual Income Tax Rates. The Bill permanently maintains the Bush era tax rates for all but "high-income" individuals.  It increases the top individual tax rate to 39.6% on joint filers with taxable income more than $450,000; heads of household over $425,000; single filers over $400,000; and married taxpayers filing separately over $225,000.  It leaves in place all other current individual income tax rates.          

Capital Gain and Dividend Rates. The Bill increases the top capital gains and dividends tax rate to 20% (from 15% in 2012) for individual taxpayers with income over $400,000 or married taxpayers over $450,000.  Taxpayers with income taxed below the 25% individual income tax rate will be subject to a capital gains and dividend rate of 0%.   Finally, taxpayers with income taxed above the 25% individual income tax rate, but below the $400,000 or $450,000 threshold will maintain the current capital gains and dividend rate of 15%.  The Bill does not, however, remove the 3.8% surtax on investment-related income and gains scheduled to go into effect in 2013.  Thus, the applicable rates for qualifying capital gains and dividends will be 23.8% for "high income" taxpayers and 18.8% for "middle income" taxpayers.

AMT Relief.  The Bill provides permanent Alternative Minimum Tax ("AMT") relief by increasing the AMT exemption ($50,600 for single filers, and $78,750 for married joint filers and surviving spouses) and indexing it to inflation for years after 2012.  This change will eliminate the need for a yearly AMT "patch" to prevent its unintended application to millions of middle and upper-middle income taxpayers.  

Transfer Tax Rate Extensions. The Bill extends most of the 2011-2012 estate and gift tax relief into 2013 and later years, with no current expiration or sunset date.  The Bill maintains the current 2012 estate, gift and generation-skipping tax (GST) exemption amount at $5,000,000 (indexed annually for inflation after 2011), while increasing the top estate, gift and GST tax rate from 35% to 40%.  For additional information on the particular estate, gift and GST tax provisions of the Bill please refer to Frost Brown Todd's Legal Update: "Congress Passes Extended Estate and Gift Tax Relief for 2013 (With a Change in Rates)."

Business Tax Extensions. The Bill extends and increases certain business tax credits and deductions that were set to expire at the end of 2012.  Most notably, the Bill extends the research tax credit, new markets tax credit, the employer wage credit for active duty military members, and certain renewable energy credits such as the electric vehicle and biofuel producer credits. In addition, the Bill maintains and extends the availability of certain deductions including those for domestic production activities, state and local sales taxes, and certain charitable deductions.  The Bill also includes an assortment of special depreciation provisions for businesses, including extension of the 50% first-year bonus depreciation for qualified property, qualified improvements for restaurants and buildings, depreciation for motorsports entertainment complexes (NASCAR) and film and television productions.  Finally, the Bill retains exclusions applicable to U.S. shareholders of foreign corporations for certain business and finance activities overseas.   

Individual Tax Extensions. The Bill extends and increases certain individual tax credits that otherwise would have expired in 2013, including the college tuition credit, earned income tax credit, the child tax credit, as well as the exclusion for discharge of qualified principal residence indebtedness. 

Payroll Tax Increase. The Bill allows the 2% Social Security tax reduction in place throughout 2012 to expire.  Beginning in 2013, wage earners will see an increase in the Social Security payroll tax from 4.2% to 6.2% of W-2 compensation up to the annual  Social Security wage base limit ($113,700 in 2013).

High-Income Exemption Phase-Out and Deduction Limitations. The Bill reinstates the Personal Exemption Phaseout (PEP) for certain "high-income" taxpayers.  In 2013, taxpayers with an adjusted gross income (AGI) above a certain threshold will be subject to reductions on the amount of personal exemptions to which they are entitled.  In addition, the Bill reinstates a limitation on the itemized deductions allowed for taxpayers above a certain AGI.