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2012 Taxpayer Relief Act - Key Individual Tax Breaks

January 22, 2013

Andrew S. Lattimer, CPA
Partner

On January 2, 2013, the President signed into law the American Taxpayer Relief Act of 2012 (“2012 Taxpayer Relief Act”). The new laws may be seen in many lights as there are both positive and negative aspects to the changes.  The largest and most publicized component of the 2012 Taxpayer Relief Act is the restoration of the pre-Bush era income tax rates for some high-income taxpayers.  As we peel back the layers of the tax laws, we see not only increases in tax rates from 2012 but a reduction in deductions allowable by higher-income taxpayers.  With that being said, there are some very positive aspects of the new law such as permanently increasing the AMT exemption amount and restoring favorable tax credits.  Below is a synopsis of the major tax provisions:

Individual Tax Rates for Higher-Income Taxpayers
For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the income tax rates for most individuals will remain at 10%, 15%, 25%, 28%, 33% and 35%. However, a 39.6% rate will apply to taxable income above a certain threshold (specifically, taxable income in excess of the “applicable threshold” over the dollar amount at which the 35% bracket begins). The applicable threshold is $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. These dollar amounts are inflation-adjusted for tax years after 2013. (See tax rate tables below.)

Capital Gains & Qualified Dividends Rate for Higher-Income Taxpayers
For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the top rate for capital gains and qualified dividends will permanently rise to 20% (up from 15%) for taxpayers with taxable incomes exceeding $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married taxpayers filing separately. It should also be noted that beginning in 2013 there is 3.8% surtax on investment type income, thereby increasing the tax rate on capital gains and qualified dividends to 23.8% for higher-income taxpayers.

For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will permanently be subject to a 0% rate. Taxpayers who are subject to a 25% or greater rate on ordinary income, but whose taxable income levels fall below the applicable threshold — $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married taxpayers filing separately — will continue to be subject to a 15% rate on capital gains and qualified dividends. The 3.8% surtax mentioned above will also affect taxpayers in this bracket if their income exceeds $250,000 married filing jointly. 

Phase-out of Personal Exemptions for Higher-Income Taxpayers
For tax years beginning after 2012, the phase-out of personal exemptions, 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 phase-out, 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 AGI exceeds the applicable threshold. These dollar amounts are inflation-adjusted for tax years after 2013.

3% / 80% Limitation on Itemized Deductions for Higher-Income Taxpayers
For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the “Pease” limitation on itemized deductions, 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. Thus, 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. These dollar amounts are inflation-adjusted for tax years after 2013.

Standard Deduction Marriage Penalty Relief Made Permanent
The 2012 Taxpayer Relief Act permanently extends the standard deduction marriage penalty relief that otherwise would have expired at the end of 2012. The basic standard deduction for a married couple filing a joint return continues to be twice the basic standard deduction for an unmarried individual filing a single return. And the basic standard deduction for married couples filing separately equals the basic standard deduction for single.

AMT Exemption Permanently Increased with Indexing
Retroactively effective for tax years beginning after 2011, the 2012 Taxpayer Relief Act permanently increases the AMT exemption amounts. As a result, the AMT exemption amounts for tax years beginning after 2011 are as follows:

  • Married individuals filing jointly and surviving spouses: $78,750, less 25% of AMTI exceeding $150,000 (zero exemption when AMTI is $465,000);
  • Unmarried individuals: $50,600, less 25% of AMTI exceeding $112,500 (zero exemption when AMTI is $314,900); and
  • Married individuals filing separately: $39,375, less 25% of AMTI exceeding $75,000 (zero exemption when AMTI is $232,500). But AMTI is increased by the lesser of $39,375 or 25% of the excess of AMTI (without the exemption reduction) over $232,500.

In addition, for tax years beginning after 2012, the 2012 Taxpayer Relief Act indexes these exemption amounts for inflation.

Personal Non-refundable Credits May Offset AMT and Regular Tax for All Tax Years
Retroactively effective for tax years beginning after 2011, the 2012 Taxpayer Relief Act permanently allows an individual to offset his entire regular tax liability and AMT liability by the non-refundable personal credits.

Expanded American Opportunity Tax Credit Extended
The 2012 Taxpayer Relief Act provides a five-year extension of the expanded AOTC, allowing it to be claimed in tax years after 2008 and before 2018.

Various Child Tax Credit Provisions Made Permanent or Extended
The 2012 Taxpayer Relief Act eliminated the “sunsetting” provision in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) that would have caused the $1,000 credit amount and other EGTRRA rules to expire. Thus, these rules are now permanent. The 2012 Taxpayer Relief Act also provides a five-year extension of ARRA's provision on refundability, such that it applies in tax years after 2008 and before 2018.

Certain Earned Income Tax Credit Rules Extended
The 2012 Taxpayer Relief Act provides a five-year extension of these favorable EITC rules, rendering them applicable to tax years after 2008 and before 2018.

 

 2013 RATE SCHEDULES
 

FOR SINGLE INDIVIDUALS

(OTHER THAN HEADS OF HOUSEHOLDS AND SURVIVING SPOUSES)

If taxable income is:                

The tax would be:

Not over $8,925                       

10% of taxable income

Over $8,925 but not over $36,250                           

$892.50 plus 15% of the excess over $8,925

Over $36,250 but not over $87,850      

$4,991.25 plus 25% of the excess over $36,250

Over $87,850 but not over $183,250 

$17,891.25 plus 28% of the excess over $87,850

Over $183,250 but not over  $398,350

$44,603.25 plus 33% of the excess over $183,250

Over $400,000

$116,163.75 plus 39.6% of the excess over $400,000

 

FOR HEADS OF HOUSEHOLDS

If taxable income is:                

The tax would be:

Not over $12,750

10% of taxable income

Over $12,750 but not  over $48,600                           

$1,275.00 plus 15% of the excess over $12,750

Over $48,600 but not over $125,450                    

$6,652.50 plus 25% of the excess over $48,600

Over $125,450 but not over $203,150     

$25,865.00 plus 28% of the excess over $125,450

Over $203,150 but not over $398,350

$47,621.00 plus 33% of the excess over $203,150

Over $398,350 but not over $425,000    

$112,037.00 plus 35% of the excess over $398,350

Over $425,000                         

$121,364.50 plus 39.6% of the excess over $425,000

 

FOR MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES

If taxable income is:                

The tax would be:

Not over $17,850                      

10% of taxable income

Over $17,850 but not over $72,500                  

$1,785.00 plus 15% of the excess over $17,850

Over $72,500 but not over $146,400                  

$9,982.50 plus 25% of the excess over $72,500

Over $146,400 but not over $223,050 

$28,457.50 plus 28% of the excess over $146,400

Over $223,050 but not over $398,350 

$49,919.50 plus 33% of the excess over $223,050

Over $398,350 but not over $450,000               

$107,768.50 plus 35% of the excess over $398,350

Over $450,000                         

$125,846.00 plus 39.6% of the excess over $450,000

 

FOR MARRIED FILING SEPARATE RETURNS

If taxable income is:                

The tax would be:

Not over $8,925                       

10% of taxable income

Over $8,925 but not over $36,250                    

$892.50 plus 15% of the excess over $8,925

Over $36,250 but not over $73,200                  

$4,991.25 plus 25% of the excess over $36,250

Over $73,200 but not over $111,525                  

$14,228.75 plus 28% of the excess over $73,200

Over $111,525 but not over $199,175

$24,959.75 plus 33% of the excess over $111,525

Over $199,175 but not over $225,000 

$53,884.25 plus 35% of the excess over $199,175

Over $225,000                         

$62,923.00 plus 39.6% of the excess over $225,000

 

Disclaimer: Under U.S. Treasury Department guidelines, we hereby inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service (or state and local or other tax authorities), and (2) no part of any tax advice contained in this communication is intended to be used, and cannot be used, by any party to promote, market or recommend any transaction or tax-related matter(s) addressed herein without the express and written consent of Blum, Shapiro & Company, P.C.

 

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