Tax Tip #23: American Taxpayer Relief Act of 2012

On January 2, 2013, the President signed the American Taxpayer Relief Act of 2012. The law did not extend the 2% cut in payroll tax on wages and self-employment income.  The new law does make several changes that will affect your 2013 tax returns, and it also makes many other changes that are permanent.

Here’s an excerpt from Wikipedia:

Tax provisions

For individuals with taxable income of $400,000 per year or less ($450,000 for a married couple on a joint tax return, both thresholds to be indexed for inflation after 2013), the tax rates for income, capital gains, and dividends remained at their 2012 levels, instead of reverting to the higher rates from the expiration of the Bush tax cuts.

For individuals with taxable income over the $400,000/$450,000 thresholds:

1. The top marginal tax rate on income of 39.6%, provided for under the expiration of the 2001 portion of the Bush tax cuts, was retained. This was an increase from the 2003–2012 rate of 35%.
2. The top marginal tax rate on long-term capital gains of 20%, provided for under the expiration of the 2003 portion of the Bush tax cuts, was retained. This was an increase from the 2003–2012 rate of 15%.
3. The top marginal tax rate on dividends, which would have increased to the ordinary income rate of 39.6% due to the expiration of the 2003 portion of the Bush tax cuts, was set to the capital-gains rate of 20%. This was an increase from the 2003–2012 rate of 15%.
4. A phase-out of tax deductions and credits for incomes over $250,000 for individuals and $300,000 for couples was reinstated. Limits on deductions had existed before the Bush tax cuts, and had disappeared in 2010.
5. Estate taxes were set at 40% of the value above $5,000,000, indexed for inflation, an increase from the 2012 rate of 35% of the value over $5,120,000.
6. Changes were made to the Alternative Minimum Tax to permanently index it to inflation and thus to avoid the annual “patch” that was previously required to prevent it from impacting middle-class families.
7. The two-year old cut to payroll taxes was not extended. The rate had been reduced from 6.2% to 4.2% for 2011 and 2012.
8. Some tax credits for poorer families were extended for five years, including ones for college tuition and an expansion of the Earned Income Tax Credit.
9. A number of corporate tax breaks were extended, including the “active financing” tax exemption for major corporations (cost $9 billion), the New Markets Tax Credit Program (cost $1.365 billion annually), a rum tax supporting Puerto Rico and Virgin Islands rum industry ($547 million in 2009), a tax benefit for NASCAR racetrack owners (around $43 million), tax credits for two- and three-wheeled electric vehicles and hiring of individuals who are members of a Native American tribe.

In all, the bill included $600 billion over ten years in new tax revenue, about one-fifth of the revenue that would have been raised had no legislation been passed. For the tax year 2013, some taxpayers will experience the first year-to-year income-tax rate increase since 1993, although the rate increase came about not as a result of the 2012 Act, but as a result of the expiration of the Bush tax cuts. The new rates for income, capital gains, estates, and the alternative minimum tax would be made permanent.

Click here to view the entire article on Wikipedia,

To find out more about how these changes will affect you, contact us at 559.924.1225.