January 4, 2013
With the passing of the new ‘Fiscal Cliff” Act, taxpayers need to be aware of how it may affect them in the coming years. As such, we’ve compiled detailed information for you within this blog post.At a high level, the act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) with a few modifications targeting the wealthiest Americans with higher taxes. The new bill also temporarily extends many other tax provisions that had lapsed at midnight on December 31, 2012, and others that had expired a year earlier. (NOTE: Among the tax items not addressed by the act was the temporary lower 4.2% rate for employees’ portion of the Social Security payroll tax, which was not extended and has reverted to 6.2%.)
The following are the act’s main tax features:
Individual Tax Rates—All the individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).
Phase-out of Itemized Deductions & Personal Exemptions—The personal exemptions and itemized deductions phase-out is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.
Capital Gains & Dividends—A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.
Alternative Minimum Tax—The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Relief from AMT for nonrefundable credits is retained.
Estate & Gift Tax—The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act.
Permanent Extensions—Various temporary tax provisions enacted as part of EGTRRA were made permanent. These include:
Individual Credits Expired at the End of 2012—The American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2018. Other credits and items from the American Recovery and Reinvestment Act of 2009 that were extended for the same five-year period include enhanced provisions of the child tax credit under Sec. 24(d) and the earned income tax credit under Sec. 32(b). In addition, the bill permanently extends a rule excluding from taxable income refunds from certain federal and federally assisted programs (Sec. 6409).
Individual Provisions Expired at the End of 2011—The act also extended through 2013 a number of temporary individual tax provisions, most of which expired at the end of 2011:
Business Tax Extenders—The act also extended many business tax credits and other provisions. Notably, it extended through 2013 and modified the Sec. 41 credit for increasing research and development activities, which expired at the end of 2011. The credit is modified to allow partial inclusion in qualified research expenses and gross receipts those of an acquired trade or business or major portion of one. The increased expensing amounts under Sec. 179 are extended through 2013. The availability of an additional 50% first-year bonus depreciation (Sec. 168(k)) was also extended for one year by the act. It now generally applies to property placed in service before Jan. 1, 2014 (Jan. 1, 2015, for certain property with longer production periods). Other business provisions extended through 2013, and in some cases modified, are:
Energy Tax Extenders—The act also extends through 2013, and in some cases modifies, a number of energy credits and provisions that expired at the end of 2011:
Foreign Provisions—The IRS’s authority under Sec. 1445(e)(1) to apply a withholding tax to gains on the disposition of U.S. real property interests by partnerships, trusts, or estates that are passed through to partners or beneficiaries that are foreign persons is made permanent, and the amount is increased to 20%.
New Taxes—In addition to the various provisions discussed above, some new taxes also took effect Jan. 1 as a result of 2010’s health care reform legislation.
For a comprehensive article on the what the ‘fiscal cliff’ bill means to taxpayers (including non-tax items),” click here. Be sure to contact one of our professionals with questions. Remember, we are here to help.
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