The American Taxpayer Relief Act  

 Contributed by SSA, P.C.

After weeks, indeed months, of proposals and counter-proposals, seemingly endless negotiations, and down-to-the-wire drama, Congress has passed legislation to avert the tax side of the so-called "fiscal cliff." The American Taxpayer Relief Act permanently extends the Bush-era tax cuts for lower and moderate income tax payers, permanently "patches" the alternative minimum tax (AMT), provides for a permanent 40 percent federal estate tax rate, renews many individual, business, and energy tax extenders, and more. In one immediately noticeable effect, the American Taxpayer Relief Act does not extend the 2012 employee-side payroll tax holiday.

The American Taxpayer Relief Act is intended to bring some certainty to the Tax Code. At the same time, it sets the stage for comprehensive tax reform, possibly in 2013. Moreover, it creates important planning opportunities for taxpayers, which we can discuss in detail.

Tax Rates.The American Taxpayer Relief Act extends, permanently, the Bush-era income tax rates for all taxpayers except taxpayers with taxable income above certain thresholds:

$400,000 for single individuals, $450,000 for married couples filing joint returns, and $425,000 for heads of households. For 2013 and beyond, the federal income tax rates are 10, 15, 25, 28, 33, 35, and 39.6 percent. In comparison, the top rate before 2013 was 35 percent. The IRS is expected to issue revised income tax withholding tables to reflect the 2013 rates as quickly as possible and provide guidance to employers and self-employed individuals.

Additionally, the new law revives the Pease limitation on itemized deductions and personal exemption phase out (PEP) after 2012 for higher income individuals, but at revised thresholds. The new thresholds for being subject to both the Pease limitation and PEP after 2012 are $300,000 for married couples and surviving spouses, $275,000 for heads of households, $250,000 for unmarried taxpayers, and $150,000 for married couples filing separate returns.  

Capital Gains. The taxpayer-friendly Bush-era capital gains and dividend tax rates are modified by the American Taxpayer Relief Act. Generally, the new law increases the top rate for qualified capital gains and dividends to 20 percent (the Bush-era top rate was 15 percent). The 20 percent rate will apply to the extent that a taxpayer's income exceeds the $400,000/$425,000/$450,000 thresholds discussed above. The 15 percent Bush-era tax rate will continue to apply to all other taxpayers (in some cases zero percent for qualified taxpayers within the 15-percent-or-lower income tax bracket).

Payroll Tax Cut. The employee-side payroll tax holiday is not extended. Before 2013, the employee-share of OASDI taxes was reduced by two percentage points from 6.2 percent to 4.2 percent of the Social Security wage base (with a similar tax break for self-employed individuals). For 2013, the two percent reduction is no longer available and the employee-share of OASDI taxes reverts to 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent. In 2012, the payroll tax holiday could save a taxpayer up to $2,202 (taxpayers earning at or above the Social Security wage base for 2012). As a result of the expiration of the payroll tax holiday, everyone who receives a paycheck or self-employment income will see an increase in taxes in 2013.

AMT. In recent years, Congress routinely "patched" the AMT to prevent its encroachment on middle income taxpayers. The American Taxpayer Relief Act permanently patches the AMT by giving taxpayers higher exemption amounts and other targeted relief. This relief is available beginning in 2012 and going forward. The permanent patch is expected to provide some certainty to planning for the AMT. No single factor automatically triggers AMT liability, but some common factors are itemized deductions for state and local income taxes, itemized deductions for miscellaneous expenditures, itemized deductions on home equity loan interest (not including interest on a loan to build, buy, or improve a residence), and changes in income from installment sales. SSA can help you gauge if you may be liable for the AMT in 2013 or future years.

Federal Estate Tax. Few issues have complicated family wealth planning in recent years as has the federal estate tax. Recent laws have changed the maximum estate tax rate multiple times. Most recently, the 2010 Taxpayer Relief Act set the maximum estate tax rate at 35 percent with an inflation-adjusted exclusion of $5 million for estates of decedents dying before 2013. Effective January 1, 2013, the maximum federal estate tax will rise to 40 percent, but will continue to apply an inflation-adjusted exclusion of $5 million. The new law also makes permanentportability between spouses and some Bush-era technical enhancements to the estate tax. 

Bonus Depreciation/Small Business Expensing.The new law renews 50 percent bonus depreciation through 2013 (2014 in the case of certain longer-period production property and transportation property). Code Sec. 179 small business expensing is also extended through 2013, with a generous $500,000 expensing allowance and a $2 million investment limit. Without the new law, the expensing allowance was scheduled to plummet to $25,000 with a $200,000 investment limit.

Energy

For individuals and businesses, the new law extends some energy tax incentives. The Code Sec. 25C, which rewards homeowners who make energy efficient improvements with a tax credit, is extended through 2013. Businesses benefit from the extension of the Code Sec. 45 production tax credit for wind energy, credits for biofuels, credits for energy-efficient appliances, and many more.

Looking Ahead 

The negotiations and passage of the new law are likely a dress rehearsal for comprehensive tax reform during President Obama's second term. Both the President and the GOP have called for making the Tax Code more simple and fair for individuals and businesses. The many proposals for tax reform include consolidation of the current individual income tax brackets, repeal of the AMT, moving the U.S. from a worldwide to territorial system of taxation, and a reduction in the corporate tax rate. Congress and the Obama administration also must tackle sequestration, which the American Taxpayer Relief Act delayed for two months. All this and more is expected to keep federal tax policy in the news in 2013. SSA will keep you posted of developments.

If you have any questions about the American Taxpayer Relief Act, please contact the Accounting Team at SSA, P.C. and schedule an appointment to discuss how the changes in the new law may be able to maximize your tax savings.

 (originally published in January 2013 eNewsletter) 

SSA, P.C., is one of the city's oldest certified public accounting firms, dating back to 1974. It is a full-service firm providing audit, tax, consulting, and business valuation services to a wide range of industries, including some of the Pike's Peak region's most successful businesses and individuals. Its service mantra, "Better Solutions, Better Outcomes," is supported by years of experience and a proven process of uncovering what clients really want from their businesses and helping them achieve those goals.  Contact SSA, P.C.through its website, www.4ways.com, or at 719-574-0100.