Understanding the American Taxpayer Relief Act of 2012

Understanding the American Taxpayer Relief Act of 2012

Understanding the American Taxpayer Relief Act of 2012

The American Taxpayer Relief Act of 2012 extends many of the 2001, 2003 and 2009 tax cuts.

Allows Social Security tax rates to return to prior levels, increases income tax rates and limits deductions and exemptions for taxpayers at hiqherlevels.  It's important for investors to note that the rate increases and deduction limits become effective at different income levels. Key provisions of the law are summarized below.  Many of the major provisions of this legislation are “permanent," at least insofar as they do not have a built-in expiration date. However, tax legislation seems to be ever-evolving. Congress must still deal with a number of fiscal issues throughout 2013 and the subsequent years, and the solutions enacted may involve additional tax policy changes. Before making any substantial or irreversible decisions based on this new legislation, you'll want to talk with all of your Advisors and tax professionals.  These advisors can also help you stay abreast of future developments in the coming months.

As always, stay focused on your long-term goals and maintaining an appropriate allocation for your objectives and risk tolerance.

American Taxpayer Relief Act of 2012 - Summary of new tax law changes January 2013

Income taxes:

The legislation retains the current ordinary income tax rates, and adds a new tax rate of 39.6%

for taxable income over $400,000 (single) and $450,000 (married filing jointly).

Payroll taxes:

The 2%reduction in Social Security payroll tax rates expires. Withholding amounts will be adjusted accordingly, generally resulting in less take-home pay.

Capital gains taxes:

  • The Act retains the 0%long-term capital gains rate for those in the 10%and 15%tax brackets.
  • Taxpayers in the 25%through 35%tax brackets will have a 15% long-term capital gain tax rate.
  • Taxpayers in the 39.6%tax bracket will pay 20%on long-term capital gains.

Qualified dividend tax rates:

The act preserves the favorable tax treatment for qualified dividend at the following rates:

  • 0%for those in the 10%and 15%tax brackets.
  • 15%for taxpayers in the 25%through 35%tax brackets
  • 20%for taxpayers in the 39.6%tax bracket.
  • Nonqualified dividends will continue to be taxed at the taxpayer's ordinary income tax rate.

Itemized deduction limit:

Taxpayers with adjusted gross income (AGI) above a $250,000 (single) and $300,000 (married filing jointly) threshold will lose a portion of their itemized deductions. The "haircut" will equal 3% of the amount by which income exceeds these thresholds, but cannot exceed 80% of itemized deductions.

Personal exemption limits:

Taxpayers with AGI above a $250,000 (single) or $300,000 (married filing jointly) threshold will lose a portion of their personal exemptions. Available personal exemptions will be reduced 2% for each $2,500 (or portion thereof) of income above the threshold.

Alternative minimum tax

The alternative minimum tax (AMT) income levels were raised to $50,600 (single) and $78,750 (married filing jointly) for 2012 and indexed for inflation, thus removing the year-by-year uncertainty.


Child tax credit

The child tax credit remains at $1,000.

Education Savings Accounts (ESAs)

Contribution amounts will remain at $2,000, the contribution deadline remains April 15 following the applicable contribution year, and qualified expenses continue to include those related to enrollment in elementary and secondary education.

American Opportunity Tax Credit

The Act preserves the American Opportunity Tax Credit through Dec. 31, 2017, providing a tax credit up to $2,500 per student for the first four years of qualified higher education expenses paid.

Qualified charitable distributions  (QCDs) from IRAs

The Act reinstates tax-free QCDs for tax years 2012 and 2013. Eligible IRA owners may make a QCD before Feb. 1, 2013 and treat it as though it were made on Dec. 31, 2012. Additionally, for IRA distributions made after Nov. 30, 2012 and before Jan. 1, 2013 taxpayers may transfer the distributed funds in cash to charity during January 2013 and retroactively elect to treat the distribution as a QCD.

Estate, gift and GST tax exclusions

 The estate tax applicable exclusion, gift tax lifetime exclusion, and generation-skipping tax ("GST") exemption all remain at $5 million, adjusted for inflation. According to unofficial estimates, the adjusted amount for 2013 should be $5,220,000.

Estate and gift tax rates:

Estate and gift tax rates increase from 35%to 40%.

Exclusion portability

The Act preserves the concept of exclusion portability. This provision allows a surviving spouse to elect to receive the unused applicable exclusion of a deceased spouse.

Annual gifts:

The annual exclusion gift amount increases Annual gifts to $14,000 (from 2012's $13,000).

Business provisions

The act extends a variety of business tax breaks and changes, including an accelerated "bonus" depreciation of business investments in new property and equipment, tax credits for research and development as well as renewable energy. If you own or manage a business, consult with your firm's tax advisor for details.

Medicare surtax

For taxpayers with modified adjusted gross income above $200,000 (single) or $250,000 (joint filers), a new 3.8%tax will apply to net investment income. For taxpayers with compensation or self-employment income above $200,000 (single) or $250,000 (joint filers), an additional 0.9% tax will apply to compensation or self-employment income above these thresholds.

Medical expense deduction

For medical expenses to be deductible, the amount of the medical expenses must first exceed a 10%of AGI floor (compared to a 7.5%threshold in 2012).  


The above are only highlights of this extensive legislation. Certain other provisions and changes may affect your situation. Talk with your Advisors about the potential effects of this new tax environment on your portfolio and investment strategies. You should also consult with your tax advisor and perhaps estate attorney to assess whether any adjustments are needed in your tax and estate strategies.  If your investments include a real estate and you require advise or would like to talk through options give us a call and we would be glad to sit down and discuss your situation.



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