ATRA 2012 for High-Income Individuals

ATRA 2012 for High-Income Individuals 
In the waning hours of January 1, Congress passed the American Taxpayer Relief Act (ATRA) of 2012 as part of an effort to resolve the fiscal cliff dilemma. President Obama signed the Act into law on January 02, 2013. While the new law reduces taxes on many low, middle, and upper-middle income taxpayers, it is not so favorable for high-income taxpayers. Under ATRA, higher tax rates apply to taxpayers with adjusted gross income above certain thresholds (i.e., $400,000 for individual filers, $425,000 for heads of households, $450,000 for married taxpayers filing jointly, and $225,000 for married filing separately status). The top tax rate is 39.6 percent.

Additionally, while the lower capital gain rates of zero and 15 percent were extended for taxpayers in the 25 percent and lower tax brackets, the capital gain rate for taxpayers in higher tax brackets is increased to 20 percent. As under prior law, higher rates apply to gain or loss from the sale of collectibles and the eligible gain from the sale of qualified small business stock, as well as unrecaptured Section 1250 gain, regardless of the taxpayer's tax bracket.

Other provisions that may cause you to pay more tax in 2013 than in prior years include the phaseout of personal exemptions and the phaseout of overall itemized deductions if your income exceeds a certain threshold (i.e., $250,000 (individual filers), $275,000 (heads of households), $300,000 (married filing jointly), and $150,000 (married filing separately)) for tax years beginning after December 31, 2012.

ATRA also made permanent several estate and gift tax changes. The exemption from estate and gift taxes was increased to $5,250,000 for 2013 and indexing of the exemption amount was made permanent going forward. However, the top estate tax rate was increased from 35 percent to 40 percent for estates of decedents dying after December 31, 2012. ATRA also makes permanent the provision that allowed the executor of a deceased spouse's estate to transfer any unused exemption amount to the surviving spouse.

While ATRA increased the Alternative Minimum Tax (AMT) exemptions for 2012, those exemptions phase out for income over certain amounts. The exemption amounts for 2012 are $78,750 (joint return), $50,600 (single and head of household), $39,375 (married filing separately) and are reduced (but not below zero) by an amount equal to 25 percent of the amount by which the alternative minimum taxable income of the taxpayer exceeds (1) $150,000 in the case of a joint return or a surviving spouse; (2) $112,500 in the case of an individual who is unmarried and not a surviving spouse; and (3) $75,000 in the case of a married individual filing a separate return. ATRA indexes the exemption and phase-out amounts for years after 2012 and allows nonrefundable personal credits to reduce AMT.

The new law isn't entirely bad news, as it did extend several favorable provisions from the Bush era tax cuts. The following are some ATRA extensions that may help reduce your taxes this year.

Extension of Tax-Free Distributions from IRAs for Charitable Purposes

A qualified charitable distribution (QCD) from an IRA is excluded from gross income. This exclusion expired for distributions made in tax years after December 31, 2011. ATRA extends the availability of the exclusion to distributions made in tax years beginning after December 31, 2011, and before January 1, 2014.

If a taxpayer makes a QCD during January 2013, he or she can elect to have the QCD treated as if it were made in 2012. Also, the taxpayer may treat any portion of a distribution from an IRA during December 2012 as a QCD to the extent (1) that portion is transferred in cash after the distribution to an eligible charitable organization before February 1, 2013, and (2) that portion is part of a distribution that would meet the requirements of QCD but for the fact that the distribution was not transferred directly to the organization.

Extension of Special Rule for Contributions of Capital Gain Real Property Made for Conservation Purposes

The deduction for qualified conservation contributions is generally limited to 50 percent of adjusted gross income (100 percent, in the case of certain qualified farmers and ranchers), minus the deduction for all other charitable contributions. In other words, the 30-percent limitation on contributions of capital gain property by individuals does not apply to qualified conservation contributions. The special percentage limitations expired for contributions made after December 31, 2011. ATRA extends the availability of the special percentage limitations to contributions made in tax years beginning before January 1, 2014.

Extension of State and Local General Sales Taxes Deduction

The election to deduct state and local general sales taxes (instead of state and local income taxes) as an itemized deduction was to expired for tax years after December 31, 2011. ATRA extends the availability of that election to tax years beginning before January 1, 2014.

Extension of Temporary Exclusion of 100 Percent of Gain on Certain Small Business Stock

A noncorporate taxpayer can exclude 50 percent (60 percent for certain empowerment zone businesses) of gain from the sale of certain small business stock acquired at original issue and held for at least five years. For stock acquired after February 17, 2009 and on or before September 27, 2010, the exclusion was increased to 75 percent. For stock acquired after September 27, 2010 and before January 1, 2012, the exclusion was 100 percent and the AMT preference item attributable for the sale is eliminated. Qualifying small business stock is from a C corporation whose gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and who meets a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of ten times the taxpayer's basis in the stock or $10 million of gain from stock in that corporation.

ATRA extends the 100-percent exclusion and the exception from minimum tax preference treatment for two years (i.e., for stock acquired before January 1, 2014). In the case of any stock acquired after February 17, 2009, and before January 1, 2014, the date of acquisition for purposes of determining the percentage exclusion is the date the holding period for the stock begins.

Extension of Credit for Energy-Efficient Existing Homes

A taxpayer is allowed a 10-percent nonbusiness energy property credit for the purchase of qualified energy efficiency improvements to existing homes. Additionally, a taxpayer can claim specified credits for the purchase of specific energy efficient property originally placed in service by the taxpayer during the tax year. There is a lifetime limitation of $500 on the total amount of nonbusiness energy property credit that may be claimed. There are also dollar limitations on the amount of the credit that may be claimed for specific types of qualified energy efficiency improvements and residential energy property. This credit was to expire for any property placed in service after December 31, 2011. ATRA extends the availability of the credit to property placed in service before January 1, 2014.

As you can see, the provisions in the American Taxpayer Relief Act of 2012 are quite extensive. Please call me at your earliest convenience so we can discuss how these changes will impact your tax situation.

Courtesy: Parker Tax Pro Library: January 17, 2013 - Executive Editor at Parker Tax Publishing

CIRCULAR 230 DISCLOSURE: Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained herein is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.