Individual Impact on American Taxpayer Relief Act of 2012

On January 2, 2013, Congress passed the American Taxpayer Relief Act of 2012.  Here are impacts to individual taxpayers from the passage of this bill.  We can help you understand the effect that the following changes will have on your tax situation.

  • Tax increase on the highest incomes in 2013 – Taxpayers (including those who receive income through partnerships and S corporations) who earn more than $400,000 ($450,000 for married filing joint) have a marginal tax rate of 39.6%.
  • Higher capital gains rates for top earners – For taxpayers affected by the tax increase above, the capital gains and dividends rate is 20%, up from 15%.
  • Higher personal exemptions phase-out levels – The phase-out levels for personal exemptions and itemized deductions have been raised to $300,000 for married filing joint and $250,000 for individuals.
  • Permanent AMT inflation indexing – Alternative Minimum Tax was intended to prevent high-income individuals from avoiding taxes.  After years of last minute AMT “patches,” the new law permanently indexes AMT to inflation starting in 2012.  For income earned in 2012, the exemptions are $50,600 for individuals and $78,750 for married filing joint.
  • Restore the full rate for Social Security and Medicare taxes – The 2% cut for the employees portion of the Social Security payroll tax was not extended, which means it will go back to the full rate of 6.2% on income up to $113,700 in 2013.
  • Clarity on estate and gift taxes – The new law holds the estate and gift-tax exclusion at $5 million, indexed for inflation ($5.12 million in 2012).  The top tax rate jumped to 40% from 35% as of January 1, 2013.  The act made permanent the estate tax portability election, which allows a surviving spouse to use a deceased spouse’s unused exemption amount.
  • Marriage penalty relief retained – Certain taxpayers filing jointly will no longer have to worry about paying more than if they filed as single taxpayers; joint filers will enjoy a larger standard deduction.
  • Education tax benefits extended – Many education deductions were set to expire at the end of 2012, but will now remain in place under the new law.
  • Conversions to Roth Retirement plans – The new law allows participants in an employer-sponsored 401(k) to transfer any amount to a Roth 401(k); the funds will be taxed upon conversion.
  • Tax relief for mortgage loan modifications – Taxpayers struggling to pay their mortgages, or whose home values have fallen below their purchase price, were given another year of tax relief on any qualifying “indebtedness income” they may receive as a result of a loan modification or short sale on their principal residence.

Please contact us with any questions on any of the above related to the American Taxpayer Relief Act of 2012 or any other tax related questions you may have.