We are receiving many questions regarding the American Taxpayer Relief Act of 2012, the law passed to avoid the “fiscal cliff.” Outlined below are important, relevant changes that became effective January 1, 2013, including some provisions that were retroactively extended to include 2012 as well. Many of the provisions extend credits and defer tax increases that were previously set to expire on December 31, 2012. This article does not address all changes made by this Act and does not list every change, credit, or deduction that was affected. We urge you to contact a member of our Taxation Practice Group with your questions.

Tax Rates

  • Income Tax: Income tax rates for individual taxpayers earning more than $400,000 and married couples earning more than $450,000 increase from 35% to 39.6% for earnings in excess of those thresholds.
  • Payroll Tax: The Social Security payroll tax returns to 6.2% from 4.2%.
  • Estate Tax: The top rate is set to 40% with an individual exemption of $5,000,000. With planning, married couples may be able to realize an effective $10,000,000 exemption. The exemption is indexed for inflation, increasing from a $5,120,000 exemption for 2012.
  • Capital Gains and Dividend Tax: The tax rates increase to 20% for individuals earning more than $400,000 or married couples earning more than $450,000.
  • Alternative Minimum Tax: The tax threshold will be permanently indexed for inflation.

Tax Credits and Deductions

  • Personal Tax Exemptions and Deductions: The Personal Exemption Phaseout (PEP) and limits on itemized deductions (Pease Limits) will trigger at $250,000 for individuals and $300,000 for married couples.
  • Research and Development Credit: Extends the credit though 2013. The credit is also retroactively extended through 2012.
  • Wind Energy Production Tax Credit: Extends the credit through 2013. The credit gives a 2.2 cent tax break for every kWh of wind energy produced.
  • Work Opportunity Tax Credit: Extends the credit through 2013. The credit relates to hiring workers from disadvantaged, underemployed groups.
  • Earned Income Credit: Extends the credit through 2017.
  • Child Tax Credit: Extends the credit through 2017.
  • American Opportunity Tax Credit: Extends the credit through 2017. The credit allows a tax credit for eligible education expenses.
  • Classroom Supplies Deduction: Extends the credits through 2013.
  • Bonus Depreciation Allowance: Allows 50% accelerated depreciation of business investments in qualifying new assets through 2013.
  • Section 179 Expensing: Businesses may deduct (instead of depreciate) up to $500,000 in qualifying purchases. This provision is retroactively extended through 2012 and 2013.
  • Exclusion from Gross Income Relief from Home Debt: Extended through 2013, homeowners can exclude from gross income the cancellation of indebtedness related to their principal residence.
  • Railroad Track Maintenance Credit: Extends the credit through 2014.
  • Alternative Fuels Tax Credit: Extends the credits through 2013.
  • Mass Transit Income Exclusion: Retroactively increased the mass-transit expense benefit to include 2012 through 2013. Employees of eligible companies can use up to $240 in pre-tax income for commuting expenses when using mass transit.
  • Exclusion of Capital Gain on Small Business Stock: Retroactively extends through 2012 and 2013 the exclusion on qualifying small business stock gains held for more than five years.

Miscellaneous Provisions

  • In-Plan Roth Conversion: Traditional (pre-tax contribution) retirement plan participants can now voluntarily convert their funds into an in-plan Roth (post-tax contribution) account, if their plan allows. It is no longer necessary for the participant to be otherwise eligible to receive a distribution (over 59 1/2, retiring, or changing jobs). However, the participant will have to pay taxes on the converted amounts. This provides employees more flexibility in moving retirement funds from traditional to Roth accounts.
  • Unemployment Insurance: Extended unemployment benefits for those unemployed for longer than 26 weeks is extended until January 1, 2014.
  • Farm Bill Subsidies: Extends the 2008 Farm Bill through September 2013.
  • Charitable Contributions from IRA Assets: Persons age 70 ½ and older can make up to $100,000 in tax-free donations of IRA assets to charities through 2013.
  • Medicare Payments to Physicians (“Doc Fix”): Temporarily prevents, through 2013, a previously scheduled 26.5% payment cut to physicians who treat Medicare patients.
  • Sequestration: The previously scheduled set of severe spending cuts will be postponed until March 1, 2013.

Fraser Stryker is widely recognized as a regional leader in the specialized area of state sales tax, income tax, excise and real tax, personal property tax, and federal tax matters. We advise and represent taxpayers, including international clients, in planning, complying, and contesting federal, state, and local tax burdens, not only in Nebraska, but in other jurisdictions as well.

This article is provided by Fraser Stryker for general informational purposes and is not intended to be and should not be construed as legal advice on any specific facts or circumstances.

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.