$400K a year is the new 'rich'! - American Taxpayer Relief Act of 2012

$400K a year is the new 'rich'! - American Taxpayer Relief Act of 2012

ATRA 2012 permanently extends a number of tax provisions that had already expired at the end of 2011 and 2012, revises tax rates on ordinary and capital gain income, modifies the estate tax, and extends unemployment benefits, Medicare payments and farm subsidies. Some tax provisions, however, are extended only temporarily.

The following is a very brief summary of the tax provisions impacting individuals.

Individual Income Tax Rates
ATRA permanently retains the 10%, 15%, 25%, 28%, and 33% income tax brackets. The 35% tax bracket ends at $400,000 for single filers. Above this threshold, there's a new 39.6% tax bracket. Thresholds for the new 39.6% bracket for 2013 will be

MFJ or Surviving Spouse	$450,000
Head of Household	$425,000
Unmarried Individual	$400,000
Married Filing Separately	$225,000
Estate or Trust	$11,950

ATRA permanently retains the 0% and 15% tax rates on qualified dividends and long-term capital gains, and adds a new 20% tax rate that would apply to taxpayers who fall within the new 39.6% tax bracket. Which capital gains tax rate will apply depends on what tax bracket a person is in. The new capital gains tax rates for 2013 and future years will be

Tax Bracket	Capital Gains Rate
10% and 15%	-0-%
25%, 28%, 33% or 35%	15%
39.6%	20%
Net Investment income:  MfJ                > $250K Unmarried     > $200K MfS               > $125K Additional Medicare Tax Wages & S/E income: MfJ                > $250K Unmarried     > $200K MfS               > $125K (withheld by employer)	3.8%  Medicare surtax 0.9% Medicare surtax

Alternative Minimum Tax
ATRA provides the following AMT exemption amounts for 2013, and provides that these amounts will be indexed for inflation annually: 

MFJ or Surviving Spouse	$78,750
Head of Household	$50,600
Unmarried Individual	$50,600
Married Filing Separately	$39,375
Estate or Trust	$23,100

Estate Tax Rates
ATRA permanently extends the $5 million exclusion, indexed to inflation, and unified exemption amount with portability. The new top tax rate for estates is 40%.

Limitations on Deductions
Itemized deductions will be limited. The total amount of itemized deductions that are allowable as a deduction will be reduced by the lesser of 3% of the taxpayer's adjusted gross income (AGI) over the threshold amount or by 80% of otherwise allowable itemized deductions. The threshold amounts at which itemized deductions would start to be reduced are:

MFJ or Surviving Spouse	$300,000
Head of Household	$275,000
Unmarried Individual	$250,000
Married Filing Separately	$150,000

These threshold amounts would be indexed for inflation for years after 2013.

Similarly, personal exemptions will be limited. Taxpayers would see their total personal exemptions reduced by two percent for each $2,500 (or fraction thereof) by which adjusted gross income (AGI) exceeds the threshold. The threshold amounts at which personal exemptions would start to be reduced are the same as for itemized deductions, namely:

MFJ or Surviving Spouse	$300,000
Head of Household	$275,000
Unmarried Individual	$250,000
Married Filing Separately	$150,000

These threshold amounts would be indexed for inflation for years after 2013.

Other Individual Tax Deductions
• The student loan interest deduction is permanently extended. ATRA eliminates the rule that the deduction can be claimed only during the first 60 months of repayment.
• The classroom expenses deduction of up to $250 is temporarily extended through the end of 2013.
• Mortgage insurance premiums will continue to be deductible as part of the mortgage interest deduction through the end of 2013.
• The sales taxes deduction, in lieu of a deduction for state income taxes, is temporarily extended through the end of 2013.
• The charitable deduction for contributing real property for qualified conservation purposes is temporarily extended through the end of 2013.
• The above-the-line tuition and fees deduction is temporarily extended through the end of 2013.

Various Individual Tax Credits
• The child tax credit remains unchanged and is permanently extended. The maximum amount of the child tax credit is $1,000, and the credit is partially refundable. However, the provision the reduces the earnings threshold for the refundable portion of the child tax credit to $3,000 will expire at the end of 2017.
• The dependent care tax credit remains unchanged and is permanently extended. Daycare expenses up to $3,000 for one child and $6,000 for two or more children qualify for the tax credit, and these amounts are not indexed for inflation.
• The adoption credit is permanently extended. The credit is worth up to $10,000 (indexed for inflation).
• Permanently extended is the earned income tax credit for families with three or more dependents.
• The American opportunity tax credit is extended temporarily through the end of 2017.

Tax-Advantaged Savings Accounts
• ATRA permanently extends the $2,000 annual contribution limit to Coverdell Education Savings Accounts.
• The tax-free charitable distribution from IRAs of up to $100,000 per year is temporarily extended through the end of 2013. ATRA provides rules for handling IRA distributions made in December 2012 and January 2013 so as to enable IRA beneficiaries to make charitable distributions for the 2012 tax year.

Employee Benefits
• Employer provided educational assistance is permanently extended. Employers are permitted to reimburse employees for undergraduate and graduate level courses.
• Mass transit and parking benefits set at maximum of $240 per month, which is temporarily extended through the end of 2013. The amount set for tax-free reimbursement of mass transit and parking benefits is set at $240 per month for the year 2012, up from $230 a month in 2011.

Exclusions from Income
• National Health Service Corps Scholarship program and F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program are granted permanent tax-free status for recipients.
• Alaska Native Settlement Trusts are permitted to tax income to the Trust and not to the beneficiaries, a provision made permanent by ATRA.
• Federal tax refunds are now permanently disregarded in determining income and asset eligibility factors for federal assistance programs.
• The tax-free exclusion for cancellation of debt income relating to a principal residence is temporarily extended through the end of 2013.

This list of tax changes in the American Taxpayer Relief Act is not comprehensive. There are further provisions covering business deductions, business credits, and energy tax incentives.

Resources:
H.R. 8 on Thomas
H.R. 8 (pdf) from GPO
Fact Sheet from the White House
Statement by the President on the Tax Agreement
Joint Committee on Taxation: Estimated Revenue Effects (JCX-1-13)
Congressional Budget Office: Estimate of the Budgetary Effects of H.R. 8 (pdf)
C-SPAN: House Debate on Rule and General Debate on HR 8
Tax Policy Center: Congress Kicks the Fiscal Can off the Front Stoop
Tax Foundation: Modeling the Economic and Distributional Effects of the Senate Tax Bill
Dan Shaviro: The Fiscal Cliff Deal
Paul Caron: CBO on Fiscal Cliff Deal: $1 in Spending Cuts ($15 Billion) for Every $41 in Tax Increases ($620 Billion)
Ezra Klein: Everything You Need to Know about the Fiscal Cliff Deal
Journal of Accountancy: Congress Passes Fiscal Cliff Act

The Internal Revenue Service has updated various tax parameters for the year 2013 in IR-2013-4 and Revenue Procedure 2013-15.

Courtesy: William Perez, your Guide to Taxes