American Taxpayer Relief Act of 2012

Signed into law by President Barack Obama on January 2, 2013, the American Taxpayer Relief Act of 2012 (ATRA) addresses the tax side of the “fiscal cliff,” permanently extending certain tax provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). It provides a permanent patch for the alternative minimum tax (AMT), extends a number of individual and business tax provisions, and increases the top marginal income tax rate and capital gains and dividends rates on top earners.

Highlights of the ATRA include the following:

Marginal Income Tax Rate: The marginal income tax rates for individuals of 10%, 15%, 25%, 28%, 33%, and 35% on income at or below $400,000, which were set to expire at the end of 2012, are permanently extended. A new rate of 39.6% is added for taxable income over $400,000 for single filers, $425,000 for head-of-household filers, $450,000 for married couples filing jointly, and $225,000 for married couples filing separately.

The new law brings back the Pease limitation on itemized deductions and the personal exemption phaseout (PEP) for higher income taxpayers. The new thresholds for being subject to both the Pease limitation and the PEP after 2012 are $300,000 for married couples/surviving spouses, $275,000 for heads of households, $250,000 for unmarried taxpayers, and $150,000 for married couples filing separately. The dollar amounts for the Pease limitation are adjusted for inflation for tax years after 2013.

Capital Gains and Dividends: The ATRA raises the top tax rates on qualified capital gains and dividends to 20% from the top rate of 15%. The 20% rate will apply to the extent that a taxpayer’s income exceeds the $400,000/$450,000 annual income thresholds set for the highest marginal income tax rate. The 15% and 0% tax rates established under the JGTRRA will continue to apply to taxpayers with incomes below these thresholds.

Permanent AMT “Patch”: The new legislation provides a permanent “patch” for the alternative minimum tax (AMT). The 2012 exemption amounts are increased to $50,600 for unmarried individuals, $78,750 for married taxpayers filing jointly and surviving spouses, and $39,375 for married taxpayers filing separately. The 2013 AMT exemption amounts are projected to be $80,750 for married couples filing jointly and surviving spouses, $51,900 for singles and heads of household, and $40,375 for married taxpayers filing separately.

Federal Estate Tax: The maximum Federal estate tax rises from 35% to 40% effective January 1, 2013, but an inflation-adjusted exclusion of $5 million will continue to apply. The new law also makes permanent the portability between spouses of unused exclusion amounts, and the repeal of the 5% surtax on estates larger than $10 million.

Restrictions on 401(k) Rollovers to Roth Accounts Eased: Participants in 401(k)s and similar defined contribution plans had been permitted to roll over funds to designated Roth accounts in the same plan only after certain qualifying events or after reaching age 59½. The ATRA lifts most restrictions, and allows participants in 401(k) plans with in-plan Roth conversion features to convert to a Roth account at any time. While participants must pay income tax on the transferred funds, distributions from the Roth account paid out during retirement are tax-free.

Charitable Giving Tax Breaks: The ability of taxpayers ages 70½ and older to make tax-free IRA distributions to charity, up to a maximum of $100,000 per qualified taxpayer per year, is extended through 2013.

Education-Related Tax Deductions: A number of education-related tax provisions were made permanent or extended under the ATRA, including the income exclusion for employer-provided educational assistance, which allows employers to provide employees with up to $5,250 per year in educational assistance on a tax-free basis; enhancements to Coverdell education savings accounts, including the $2,000 maximum contribution; and the suspension of the 60-month rule on the student loan interest deduction. In addition, the American Opportunity Tax Credit is extended through 2017, and the above-the-line higher education tuition deduction and the teachers’ classroom expense deduction are extended through 2013.

Child Tax Credit: The ATRA makes permanent the $1,000 Child Tax Credit. The legislation also extends permanently recent enhancements to the Child and Dependent Care Credit, including the 35% credit rate and the $3,000 cap on expenses for one qualifying dependent and the $6,000 cap on expenses per family.

Energy Tax Incentives Extended: The Section 25C credit, available to homeowners who make energy-efficient improvements to their residence up to a lifetime limit of $500, is extended through 2013. The ATRA also includes extensions of the Section 45 production tax credit for wind energy, credits for the purchase of energy-efficient appliances, and for the production of certain biofuels.

Business Tax Incentives Extended: 50% bonus depreciation is renewed through 2013, or 2014 in the case of certain longer period production property and transportation property. Section 179 small business expensing is also extended through 2013 with a $500,000 expensing allowance and a $2 million investment limit.

Other extensions to business-related tax breaks through 2013 include the following:

  • The 100% exclusion from taxation of the gain from the sale or exchange of small business stock held for more than five years by non-corporate taxpayers.
  • The Research & Experimentation Tax Credit
  • Parity for pre-tax treatment of employer-provided mass transit, vanpool, and commuter parking benefits is retroactively extended from January 1, 2012 through December 31, 2013.
  • The Work Opportunity Tax Credit (WOTC) for businesses

For more information and specific guidance appropriate to your unique circumstances, consult one of our qualified tax professionals.