Early on January 1st, 2013, the Senate, by a vote of 89-8, passed H.R.8, the “American Taxpayer Relief Act” (the Act). The House passed the same bill late last night by a vote of 257-167 after 20 hours of acrimonious debate. The Act, which awaits the President’s signature, prevents many of the tax hikes scheduled to go into effect yesterday and retains various tax breaks scheduled to expire. Much to the chagrin of many Republicans, the Act also increases income taxes for some high-income individuals and provides for slight increases in transfer tax rates, while retaining higher individual transfer tax exemptions.
The Act’s key changes include:
Income taxes. The Act keeps the 2012 tax rates intact for individuals with taxable income (i.e., after itemized deductions) under $450,000 for married taxpayers, $425,000 for heads of household, and $400,000 for single taxpayers. Income above these levels would be taxed at a 39.6% rate; income below these levels are taxed at the same rates in effect as in 2012.
AMT patch. The Act permanently patches the alternative minimum tax (AMT) by increasing exemptions to the higher amounts in effect in 2011, helping an estimated 30 million taxpayers to avoid the AMT.
Capital gains and dividends. The Act raises the top rate for dividends and capital gains from 15% to 20% for taxpayers who would be subject to the new 39.6% bracket. Lower rates in effect in 2012 are retained for those in the lower income tax brackets.
Personal Exemptions Phased Out for Higher Incomes. The Personal Exemption Phaseout (PEP), which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Under the phaseout, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold.
Deduction limitations for high-income individuals. The Act reinstates the so-called “Pease“ limitation on deductions, which previously had been suspended. The limitation is imposed on incomes of at least $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. For taxpayers subject to the “Pease” limitation, the total amount of their 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.
Transfer taxes. The Act prevents steep increases in estate, gift and generation-skipping transfer (GST) tax slated to occur for individuals dying and gifts made after 2012. For estate, gift, and generation-skipping transfer (GST) tax purposes, for individuals dying and gifts made after 2012, there is a $5 million exemption (to be adjusted for inflation), and the top estate, gift and GST rate is permanently increased from 35% to 40%. Importantly, the lifetime gift tax exemption rises to $5 million; most experts predicted that the exemption would remain at $1 million.
Individual extenders. The Act extend a host of individual provisions through 2013, including the treatment of mortgage insurance premiums as qualified residence interest, deductions for State and local general sales taxes, and the above-the-line deduction for qualified tuition and related expenses.
Business tax extenders. Many key business tax breaks are extended, including depreciation provisions, notably including bonus depreciation, and the research and work opportunity tax credits.
Other items. The Act allows the two-percentage-point reduction in payroll taxes for Old Age, Survivors and Disability Insurance (OASDI) tax, commonly known as the Social Security tax, to expire, but it extends unemployment insurance and many health and energy-related provisions, as well as provides a doc fix (which stopped a 27% automatic reduction in Medicare payments to be recieved by doctors) and extends farm legislation.
Most importantly, the Act pushes consideration of the sequester down the road for a few months, when the debt ceiling also is exepcted to be reached.
The text of the Act is available at http://thomas.loc.gov/cgi-bin/query/D?c112:4:./temp/~c112D7z10J::