The much anticipated tax legislation for 2013 has finally been passed. On Tuesday, January 1, 2013, Congress passed the American Taxpayer Relief Act, H.R. 8 to avoid at least the tax side of the “Fiscal Cliff.” One of the more significant aspects of this legislation is how many previously temporary tax provisions were made permanent. Be aware that the debt ceiling as well as many of the spending cuts have yet to be addressed and those negotiations may affect some of these provisions. The major changes to the US Tax Code that may impact you are highlighted below.
Individuals
– The new top marginal rate of 39.6% has been set for individuals with taxable income over $400,000 ($450,000 for married filing jointly). The prior tax rates of 10%, 15%, 25%, 28%, 33%, and 35% rates are still in effect with 39.6% added as an additional top rate.
– The tax rate on capital gains and dividends has been increased to 20% for individuals in the new top bracket; rates remain unchanged for all other brackets at 15% and 0%.
– The itemized deduction and personal exemption phaseout threshold has been increased to $250,000 ($300,000 for MFJ), and will be indexed for inflation in future years. For taxpayers above this threshold, itemized deductions and the amount of personal exemptions begin to be limited.
– Alternative Minimum Tax (AMT) has been permanently indexed for inflation. The 2012 exemption amount has been increased to $50,600 ($78,750 for MFJ).
– Many of the energy tax credits and allowances have been extended for 2012, including credits for energy-efficient housing, appliances, and alternative fuel.
– The American Opportunity Credit has been extended until 2018. This is an education credit of up to $2,500 for students and parents who are paying college tuition.
– Taxpayers may now roll 401(k) accounts to a Roth 401(k) without the 10% distribution penalty. Taxpayers are still required to pay taxes at their ordinary income rate on the amount that is rolled into the Roth 401(k).
– The payroll tax cut of 2% was not extended to 2013. The FICA tax is now 6.2% on the Social Security wage base of $113,700.
– The ability for taxpayers to contribute directly to charities from their IRA has been extended through 2013. Taxpayers may make a 2012 contribution to a charity if made before January 31, 2013. The limit on the deduction remains $100,000.
Businesses
– 50% bonus depreciation in the first-year has been extended for qualified assets placed into service before January 1, 2014.
– Section 179 depreciation, allowing businesses to fully expense assets purchased in the first year, has remained at the expense limitation of $500,000 for 2012 and 2013.
– 15 year straight-line cost recovery has been extended for qualified leasehold improvements, restaurant buildings and improvements, and retail improvements.
– Research & Development creditshave been extended through 2013 with minor modifications.
– The Work Opportunity Tax Credit has been extended through 2013, which provides an incentive for businesses to hire otherwise hard-to-employ workers.
Estates
– The top tax rate has been increased to 40% from 35%.
– The exclusion amount for estate and gift tax has remained at $5 million as indexed for inflation.
– Portability has been made permanent allowing the surviving spouse to apply the decedent’s unused exclusion.
If you have any questions regarding any of these changes, please reach out to one of the members of our management team. There are many changes in this bill; we chose only to highlight the changes that would have the most impact on our clients.