May 29, 2013|
The new American Taxpayer Relief Act of 2012 (ATRA)-signed on January 2, 2013-features sweeping tax changes for both individual and business taxpayers. Here is a roundup of 20 of the most important provisions. Tax Changes for Individual Taxpayers 1. Income tax rates: ATRA permanently preserves the federal income tax rate structure in effect for 2012 with one addition. It creates a top income tax rate of 39.6% for single filers with taxable income above $400,000 and joint filers with taxable income above $450,000. 2. Capital gains and dividends: Previously, taxpayers could benefit from a maximum 15% tax rate (0% for certain low-income taxpayers) on long-term capital gains and qualified dividends. ATRA permanently preserves the favorable tax rates, which were scheduled to expire after 2012, with one addition. It creates a maximum tax rate of 20% for single filers with taxable income above $400,000 and joint filers with taxable income above $450,000. 3. Alternative minimum tax: The alternative minimum tax (AMT) is permanently "patched" through increased exemption amounts (indexed for inflation) and allowing nonrefundable personal credits to offset AMT and regular income tax liability in full. The changes are retroactive to the 2012 tax year, but millions of taxpayers will still have to pay the AMT. 4. Itemized deductions: Under the return of the "Pease rule," beginning in 2013 a taxpayer's itemized deductions generally are reduced by 3% of the excess adjusted gross income (AGI) above a specified threshold (but no more than 80% overall). ATRA raises the thresholds to $250,000 of AGI for single filers and $300,000 for joint filers. 5. Personal exemptions: Similarly, beginning in 2013 a taxpayer's personal exemptions (including dependency exemptions) are phased out if AGI exceeds a specific threshold. As with itemized deductions, ATRA raises the thresholds to $250,000 of AGI for single filers and $300,000 for joint filers. 6. American Opportunity Tax Credit: The popular American Opportunity Tax Credit (AOTC) is extended for five years through 2017. The AOTC, which provides a maximum credit of $2,500, is phased out for modified adjusted gross income (MAGI) above $80,000 for single filers and $160,000 for joint filers. 7. Tuition deduction: This above-the-line tuition deduction, which expired after 2012, is reinstated retroactive to the 2012 tax year and extended through 2013. It may only be claimed in lieu of one of the higher education tax credits. The maximum $4,000 deduction is reduced to $2,000 for single filers with MAGI above $65,000 and joint filers above $130,000. It is eliminated completely for single filers with MAGI above $80,000 and joint filers above $160,000. 8. Tax breaks for parents: ATRA permanently extends several tax breaks often available to parents, including provisions relating to the child tax credit, the dependent care credit, the earned income credit and the adoption tax credit (and tax exclusion for employer-provided adoption benefits). 9. Estate and gift taxes: At long last, there is greater clarity in estate planning. Beginning in 2013, ATRA permanently extends the $5 million estate-tax exemption (indexed to $5.25 million for 2013), installs a 40% top estate-tax rate (up from 35% in 2012) and makes other related changes. 10. Tax extensions: Finally, ATRA extends a long list of other tax provisions, many of them retroactive to the 2012 tax year, including: • Optional state sales tax deduction • Residential energy credit • Enhanced benefits for Coverdell Education Savings Accounts • Enhanced deduction for student loan interest • Monthly tax exclusion for certain commuting benefits • Deduction for mortgage insurance premiums • Deduction for teacher's classroom expenses • Tax exclusion for mortgage debt forgiveness • Tax benefits for donating real estate for conservation purposes • Tax-free distributions of IRA funds to charity by taxpayers age 70½ or older Note that these tax breaks are generally subject to specific dollar limits. Tax Changes for Business Taxpayers 11. Section 179 deduction: Under Section 179 of the tax code, a business can currently deduct the cost of qualified property placed in service during the year, up to a specified limit. ATRA revives a $500,000 maximum deduction through 2013, retroactive to the 2012 tax year, subject to a phaseout threshold of $2 million. It also allows a deduction of up to $250,000 for the cost of qualified leasehold improvement property, restaurant property and retail improvement property, and extends Section 179 write-offs for computer software. 12. Bonus depreciation: ATRA generally reinstates the 50% bonus depreciation tax break through 2013. This deduction may be claimed in addition to Section 179 and regular depreciation for qualified property. However, unlike Section 179 deductions, bonus depreciation is not available for used (not new) property. 13. Qualified small-business stock: Previously, an investor in "qualified small-business stock" (QSBS) can exclude from tax 100% of the gain for QSBS held for more than five years (among other requirements). This tax break was set to expire after 2012, but ATRA extends the 100% tax exclusion to sales of QSBS acquired before 2014. 14. Work Opportunity Tax Credit: In the past, a business could claim the Work Opportunity Tax Credit (WOTC) for hiring a worker from one of several economically disadvantaged groups. The maximum WOTC credit was generally $2,400. ATRA extends the WOTC through 2013, retroactive to the 2012 tax year. 15. Credit for hiring veterans: A special version of the WOTC is available for hiring qualified military veterans. The maximum credit is $9,600 per worker. ATRA extends this credit for qualified veterans, which was set to expire after 2012, for one more year through 2013.