American Taxpayer Relief Act of 2012 summary

By Jason Kestler

Kestler Financial Group, Inc.

In order to avert (or delay) the fiscal cliff, Congress passed the American Taxpayer Relief Act (ARTA) of 2012. The new law extends a majority of the Bush-era tax cuts in the same form as they have existed since 2001 or 2003 when initially enacted.

Major exceptions include a rise in income rates, including rates on capital gains and qualifying dividends, on higher-income individuals and a slight increase in the estate tax rate. In addition to a general extension of the tax rates, many other tax provisions were affected by this legislation. The following is a summary of the American Taxpayer Relief Act (ATRA) of 2012.

Individual tax rates

Taxpayers with taxable income above $400,000 ($450,000 for married taxpayers) will be taxed at 39.6 percent (up from 35 percent). All other taxpayers with taxable income below $400,000 will be taxed at the same marginal rates as during the Bush-era tax cut (0 to 33 percent).

Capital gains/dividends

The top rate for capital gains and dividends increased to 20 percent from the Bush-era maximum rate of 15 percent. The 20 percent rate will apply to the extent that the taxpayer's income exceeds the thresholds set for the 39.6 percent rate. All other taxpayers with income below the 39.6 percent threshold will continue to have their capital gains and dividends taxed at 15 percent.

Alternative minimum tax

The act also permanently "patches" the alternative minimum tax (AMT) for 2012 and subsequent years by increasing the exemption amounts with an annual inflation adjustment. The AMT exemption for 2013 increases to $51,900 for individuals ($80,750 for married filing jointly).

"Pease" limitation on itemized deductions

It revives the limitation on itemized deductions, but with slightly higher thresholds than before: $300,000 for married filing jointly and$250,000 for unmarried taxpayers. Certain items, such as medical expenses and investment interest, are excluded from the limitation.
Personal exemption phase-out

It revives the exemption phase-out rules, but with slightly higher thresholds than before: $300,000 for married filing jointly and $250,000 for unmarried taxpayers

Federal estate and gift tax

The act provides for a maximum estate tax of 40 percent with a $5 million exclusion (adjusted annually for inflation) for estates of decedents dying after December 31, 2012. It also permits "portability" between spouses. The act provides a 40 percent tax rate and a unified estate and gift tax exemption of $5 million, adjusted annually, for gifts made after 2012.

Tax credit extenders

The act extends the Child Tax credit, Earned-Income credit, Child and Dependent Care credit, and other child and education type tax credits. The Research Tax Credit and Work Opportunity Tax Credit were also extended through 2013.

Section 179 bonus depreciation

The Section 179 dollar limitation for the 2013 tax year is $500,000 with a $2 million investment limit. The act also extended the 50 percent bonus depreciation through 2013.

A reminder of other changes to the tax law that have become effective for 2013 and were left untouched by the ATRA of 2013:
  • The 2 percent payroll tax holiday was expired.
  • The payroll tax holiday was not extended into 2013.
  • The Social Security portion of your payroll tax will rise from 4.2 percent to 6.2 percent.
  • There is a 3.8 percent tax on Net Investment Income.
  • This new tax was enacted as part of the health care reform.