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2012 Taxpayer Relief Act Protects Key Individual Tax Breaks


Posted on January 4th, by Big Chief in Blog. Comments Off

2012 Taxpayer Relief Act Protects Key Individual Tax Breaks By Gregory W. Beck, CPA

On Jan. 1, 2013, Congress passed the American Taxpayer Relief Act (2012 Taxpayer Relief Act), which the President has vowed to sign as soon as it is ready for his signature. The 2012 Taxpayer Relief Act will prevent many of the tax hikes that were scheduled to go into effect this year and retain many favorable tax breaks that were scheduled to expire, but will also increase income taxes for some high-income individuals and slightly increase transfer tax rates from 2012 levels. Further, it extends a host of expired and expiring tax breaks for businesses and individuals.

This Special Study explains the key individual tax breaks, including a continuation of the Bush-era tax rates for most taxpayers and a permanent AMT “patch,” that are provided in the 2012 Taxpayer Relief Act.

For a Special Study that explains the individual income tax provisions that were extended, added, and/or modified by the 2012 Taxpayer Relief Act.

Elimination of EGTRRA Sunsetting

New law. The 2012 Taxpayer Relief Act eliminates the provision in EGTRRA that calls for its provisions to sunset. Accordingly the provisions in EGTRRA are made permanent and no longer automatically sunset in future years. (Sec. 901 of EGTRRA, as amended by Act Sec. 101(a)(1))

Reduced Individual Tax Rates Except for Higher-Income Taxpayers

New law. For tax years beginning after 2012, the income tax rates for most individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6% as would have occurred under the EGTRRA sunset). However, a 39.6% rate will apply for income above a certain threshold (specifically, income in excess of the “applicable threshold” over the dollar amount at which the 35% bracket begins). The applicable threshold is $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. These dollar amounts are inflation-adjusted for tax years after 2013. (Code Sec. 1(i)(2) and Code Sec. 1(i)(3) , as amended by Act Sec. 101(b)(1))

In addition, with the elimination of the EGTRRA sunset, the size of the 15% tax bracket for joint filers and qualified surviving spouses remains at 200% of the 15% tax bracket for individual filers. (Code Sec. 1(i)(1))

Reduced Capital Gains & Qualified Dividends Rate Except for Higher-Income Taxpayers

Under Sec. 303 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, P.L. 108-27), as modified by Sec. 102 of P.L. 109-222, favorable tax treatment is provided for long-term capital gain and qualified dividends. However, JGTRRA provided that this treatment ended after 2010.

New law. For tax years beginning after 2012, the 2012 Taxpayer Relief Act eliminates the provision in JGTRRA that provides for its provisions to sunset. Accordingly the provisions in JGTRRA are made permanent and no longer automatically sunset in future years. (Sec. 303 of JGTRRA, as amended by Act Sec. 102(a))

For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). (Code Sec. 1(h)(1), as amended by Act Sec. 102(b)) When accounting for Code Sec. 1411‘s 3.8% surtax on investment-type income and gains for tax years beginning after 2012, the overall rate for higher-income taxpayers will be 23.8%.

For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will permanently be subject to a 0% rate. (Code Sec. 1(h)(1)(B), as amended by Act Sec. 102(c)(2)) Taxpayers who are subject to a 25%-or-greater rate on ordinary income, but whose income levels fall below the $400,000/$450,000 thresholds, will continue to be subject to a 15% rate on capital gains and dividends. The rate will be 18.8% for those subject to the 3.8% surtax (i.e, those with modified adjusted gross income (MAGI) over $250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

No Phase-Out of Personal Exemptions Except for Higher-Income Taxpayers

Personal exemptions generally are allowed for the taxpayer, his or her spouse, and any dependents. For tax years beginning in 2010, there was no overall reduction in the personal exemption amount based on the taxpayer’s AGI. For tax years beginning after Dec. 31, 2010, the total amount of exemptions that could be claimed by a taxpayer was to be reduced (personal exemption phaseout (PEP)) by 2% for each $2,500 (or portion thereof) by which the taxpayer’s AGI exceeds the applicable threshold. The phase-out rate was to be 2% for each $1,250 for married taxpayers filing separate returns. However, the 2010 Tax Relief Act provided that a higher-income taxpayer’s personal exemptions weren’t phased out for two additional years (for 2011 and 2012) when AGI exceeds an inflation-adjusted threshold.

New law. For tax years beginning after 2012, the Personal Exemption Phaseout (PEP), which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Under the phaseout, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer’s AGI exceeds the applicable threshold. These dollar amounts are inflation-adjusted for tax years after 2013. (Code Sec. 151(d), as amended by Act Sec. 101(b)(2))

No 3%/80% Limitation on Itemized Deductions Except for Higher-Income Taxpayers

Unless he elects to claim the standard deduction, a taxpayer is allowed to deduct his itemized deductions (generally those deductions which aren’t allowed in computing adjusted gross income). For tax years beginning in 2010, there was no overall limitation on itemized deductions based on the taxpayer’s adjusted gross income (AGI), although separate limitations (floors) might apply to the particular deduction. For tax years beginning after Dec. 31, 2010, the total amount of itemized deductions was to be reduced (the “Pease limitation”) by 3% of the amount by which the taxpayer’s AGI exceeds a threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. However, the 2010 Tax Relief Act provided that the itemized deductions of higher-income taxpayers are not reduced for two additional years, through 2012.

New law. For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the “Pease“ limitation on itemized deductions, which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Thus, for taxpayers subject to the “Pease” limitation, the total amount of their itemized deductions is reduced by 3% of the amount by which the taxpayer’s adjusted gross income (AGI) exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. These dollar amounts are inflation-adjusted for tax years after 2013. (Code Sec. 68(b), as amended by Act Sec. 101(b)(2))

AMT Exemption Permanently Increased With Indexing

The alternative minimum tax (AMT) is the excess, if any, of the tentative minimum tax for the year over the regular tax for the year. In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount (which phases out at higher income levels). The result is alternative minimum taxable income (AMTI), which is subject to an AMT rate of 26% or 28%.

Under pre-Act law, the AMT exemption amounts for tax years beginning after 2011 were: $33,750 for unmarried individuals; $45,000 for married couples filing jointly and surviving spouses; and $22,500 for married individuals filing separately.

New law. Retroactively effective for tax years beginning after 2011, the Act permanently increases the AMT exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. In addition, for tax years beginning after 2012, it indexes these exemption amounts for inflation. (Code Sec. 55(d), as amended by Act Sec. 104)

Personal Nonrefundable Credits May Offset AMT and Regular Tax for All Tax Years

Nonrefundable personal credits—other than the adoption credit, the child credit, the savers’ credit, the residential energy efficient property credit, the non-depreciable property portions of the alternative motor vehicle credit, the qualified plug-in electric vehicle credit, and the new qualified plug-in electric drive motor vehicle credit—were to be allowed for 2012 only to the extent that the individual’s regular income tax liability exceeded his tentative minimum tax, determined without regard to the minimum tax foreign tax credit.

New law. Retroactively effective for tax years beginning after 2011, the Act permanently allows an individual to offset his entire regular tax liability and AMT liability by the nonrefundable personal credits. (Code Sec. 26(a), as amended by Act Sec. 104(c))

Recovery Act Extenders

The 2012 Taxpayer Relief Act extends for five years the following items that were originally enacted as part of the American Recovery and Investment Tax Act of 2009 and that were slated to expired at the end of 2012:

… the American Opportunity tax credit, which permits eligible taxpayers to claim a credit equal to 100% of the first $2,000 of qualified tuition and related expenses, and 25% of the next $2,000 of qualified tuition and related expenses (for a maximum tax credit of $2,500 for the first four years of post-secondary education);

… eased rules for qualifying for the refundable child credit; and

… various earned income tax credit (EITC) changes relating to higher EITC amounts for eligible taxpayers with three or more children, and increases in threshold phaseout amounts for singles, surviving spouses, and heads of households.

If you have any questions on the above, please call the Offices of Gregory W. Beck at (714) 538-1040.





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