The American Taxpayer Relief Act of 2012: What It Means to You

After months of Congressional wrangling and politically charged posturing, President Obama signed into law the American Taxpayer Relief Act of 2012 (“ATRA”), thereby avoiding the much publicized “fiscal-cliff.” While experts will no doubt be poring over the specifics of ATRA in the days to come, the following summary sets forth the more pertinent aspects of the new tax legislation.

Individual Income Taxes

  • ATRA makes permanent for 2013 and beyond the lower Bush-era tax rates for individuals earning under $400,000 annually and under $450,000 for couples. Taxable income over these levels will be taxed at the higher rate of 39.6%.
  • Dividends and capital gains are taxed at a 20% rate for individuals earning over $400,000 and couples with an income over $450,000. The current rates remain effective for individuals with income below these levels.
  • ATRA permanently indexes the alternative minimum tax (AMT) for inflation.
  • ATRA permanently reinstates a limitation on itemized deductions and the personal exemption phase-out for individuals with adjusted gross income exceeding $250,000 per year ($300,000 for joint filers), with such thresholds indexed annually for inflation.

Estate, Gift and GST Tax

  • Estate, Gift and GST exemptions are each fixed permanently at $5M, adjusted for inflation (i.e. 2012 - $5.12M; 2013 - $5.25M).
  • The tax rate on amounts in excess of the exemptions is increased from 35% to 40%.
  • The estate tax “portability” election which allows a surviving spouse to utilize the unused exemption of a deceased spouse is made permanent.
  • Short-term and zeroed-out GRATs (Grantor Retained Annuity Trusts) remain viable as Congress did not impose mandatory minimum terms for GRATS.
  • The Grantor Trust structure is preserved as are valuation discounts for family limited partnership/limited liability company interests.

Tax Extenders

ATRA extends certain temporary business and individual business provisions, including the following:

  • ATRA retroactively extends through 2013 the research and development credit and the state and local sales tax deduction.
  • ATRA extends for five years the earned income tax credit and the American Opportunity Tax Credit and makes permanent the $1,000 child care credit.
  • ATRA extends for one year the 50% bonus depreciation for qualified property under Section 168(k) of the Internal Revenue Code of 1986, as amended.

Other Tax Increases Effective January 1, 2013

  • Additional 0.9% Medicare tax is now effective on wages, compensation and self-employment income exceeding $250,000 for married individuals filing jointly, $125,000 for married individuals filing separately, and $200,000 for other individuals.
  • A new 3.8% Medicare tax is now effective on net investment income if modified adjusted gross income exceeds $250,000 for married individuals filing jointly, $125,000 for married individuals filing separately, and $200,000 for other individuals.
  • ATRA does not extend the temporary partial payroll tax holiday effective in 2011 and 2012 and the Social Security payroll tax rate will, thereby, revert back to 6.2% (from 4.2%) for the employee portion of the tax and 12.4% (from 10.4%) for self-employed individuals.

IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication 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 transaction or matter addressed herein.

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01.04.2013  |  PUBLICATION: Other Publications  |  TOPICS: Estate Planning, Family Office, Tax

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