The New Year began with some political drama, as last-minute negotiations attempted to avert sending the nation over the "fiscal cliff." Technically, we actually did go over the cliff, however briefly, as a host of tax provisions and automatic spending cuts took effect at the stroke of midnight on December 31, 2012. However, January 1, 2013, saw legislation--retroactively effective--pass the U.S. Senate, and then later the House of Representatives. The American Taxpayer Relief Act of 2012 (ATRA) permanently extends a number of major tax provisions and temporarily extends many others. Here are the basics.
For most individuals, the legislation permanently extends the lower federal income tax rates that have existed for the last decade. That means most taxpayers will continue to pay tax according to the same six tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) that applied for 2012. The top federal income tax rate, however, will increase to 39.6% beginning in 2013 for individuals with income that exceeds $400,000 ($450,000 for married couples filing joint returns).
Generally, lower tax rates that applied to long-term capital gain and qualifying dividends have permanently extended for most individuals as well. If you're in the 10% or 15% marginal income tax bracket, a special 0% rate generally applies. If you are in the 25%, 28%, 33%, or 35% tax brackets, a 15% maximum rate will generally apply. Beginning in 2013, however, those who pay tax at the higher 39.6% federal income tax rate (i.e., individuals with income that exceeds $400,000, or married couples filing jointly with income that exceeds $450,000) will be subject to a maximum rate of 20% for long-term capital gain and qualifying dividends.
Alternative minimum tax (AMT)
The AMT is essentially a parallel federal income tax system with its own rates and rules. The last temporary AMT "patch" expired at the end of 2011, threatening to increase the number of individuals subject to the AMT for 2012. The American Taxpayer Relief Act permanently extends AMT relief, retroactively increasing the AMT exemption amounts for 2012, and providing that the exemption amounts will index for inflation in future years. The Act also permanently extends provisions that allowed nonrefundable personal income tax credits used to offset AMT liability.
2012 AMT Exemption Amounts
Before Act After Act
Married filing jointly $45,000 $78,750
Unmarried individuals $33,750 $50,600
Married filing separately $22,500 $39,375
The Act makes permanent the $5 million exemption amounts (indexed for inflation) for the estate tax, the gift tax, and the generation-skipping transfer tax--the same exemptions that were in effect for 2011 and 2012. The top tax rate, however, is increased to 40% (up from 35%) beginning in 2013.
The Act also permanently extends the "portability" provision in effect for 2011 and 2012 that allows the executor of a deceased individual's estate to transfer any unused exemption amount to the individual's surviving spouse.
Phase-out or limitation of itemized deductions and personal exemptions
In the past, itemized deductions and personal and dependency exemptions phased out or limited high-income individuals. Since 2010, neither itemized deductions nor personal and dependency exemptions have been subject to phase-out or limitation based on income, but those provisions expired at the end of 2012.
The new legislation provides that, beginning in 2013, personal and dependency exemptions phase-out for those with incomes exceeding specified income thresholds. Similarly, itemized deductions will be limited. For both the personal and dependency exemptions phase-out and the itemized deduction limitation, the threshold is $250,000 for single individuals ($300,000 for married individuals filing joint federal income tax returns).
Other expiring or expired provisions made permanent
Chris Bryant, MBA, RFC® is the founder and chief executive officer (CEO) of Bryant Wealth Management, Inc., an independent, fee-only, registered investment adviser. Bryant provides financial planning services for individual investors. Chris has a Masters Degree of Business Administration in Financial Planning from Glendale University and the Registered Financial Consultant designation from the International Association of Registered Financial Consultants. Since 1999, Chris has devoted himself to the practice of financial services – helping people make money, save money, protect money, have convenience and peace of mind. Connect with Chris by E-mail or call toll-free 1-800-980-3048.
Chris Bryant is an American financial advisor.