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FISCAL CLIFF DISASTER AVOIDED - Part II: The American Taxpayer Relief Act of 2012 and Its Impact on Individual Income Taxes

With passage of "The American Taxpayer Relief Act of 2012" ("2012 Tax Act"), Congress has averted, at least in part, the fiscal cliff disaster. The 2012 Tax Act contains numerous provisions that will affect every U.S. taxpayer. Here is a brief summary of the Individual Income Tax provisions under the 2012 Tax Act.

  • Increase in Top Marginal Income Tax Rate. The new law increases the top marginal Income Tax Rate by 4.6%. In 2013, the top Income Tax Rate will be 39.6% (up from 35% in 2012). This rate applies to single taxpayers with taxable income in excess of $400,000 and married taxpayers with taxable income in excess of $450,000.
  • Dividends and Capital Gains Rates Will Increase for Higher Income Earners. The 2012 Tax Act increases dividend and capital gains rates by 5% for certain high income taxpayers. The taxpayers affected are single taxpayers with gross income in excess of $400,000 and married taxpayers with gross income in excess of $450,000. The dividend and capital gains rates on these individuals increases from 15% in 2012 to 20% for 2013 and beyond. Dividends and capital gains rates will remain unchanged for individuals below these thresholds. In addition to this increase, certain high income taxpayers will pay a 3.8% Surtax on investment income (interest, dividends, and capital gains) under "Obamacare." The 3.8% Surtax applies to the lesser of (i) net investment income; or (ii) the amount by which modified adjusted gross income exceeds $200,000 for single taxpayers and heads of household, $250,000 for married taxpayers and surviving spouses, and $125,000 for married individuals filing separately.
  • Alternative Minimum Tax ("AMT") is Permanently Patched. The AMT system was enacted long ago to ensure that taxpayers with income above a certain level (known as the "AMT Exemption") do not escape tax through tax loopholes. Previously, the AMT Exemption was not indexed for inflation and, as such, millions of taxpayers became subject to the AMT Tax. The 2012 Tax Act permanently fixes this problem by increasing the AMT Exemption and providing for inflation adjustments in future years. The AMT Exemption amounts for 2012 are $78,750 for married taxpayers (increased from $45,000) and $50,600 for single taxpayers (increased from $33,750).
  • Payroll Tax Holiday Ends - Increase in Payroll Taxes for Wage Earners. In 2010, the "Payroll Tax Holiday" was enacted to reduce the payroll tax rate on certain wages from 6.2% to 4.2% (a 2% reduction). The Payroll Tax Holiday was only in effect for two years (2011 and 2012). The 2012 Tax Act did not extend the provisions of the Payroll Tax Holiday. Therefore, wage earners will see their payroll taxes increase by 2% in 2013. This Payroll Tax increase applies to the first $113,700 in wages.
  • The Return of the Itemized Deduction Phase Out. Prior to 2010, a taxpayer's itemized deductions were "phased out" by 3% of the amount by which the taxpayer's adjusted gross income exceeded a certain threshold. This phase out returns in 2013. The adjusted gross income threshold is $300,000 for married taxpayers; $275,000 for head of household taxpayers; and $250,000 for single taxpayers. These amounts will be indexed for inflation for future years.
  • The Return of the Personal Exemption Phase Out. In 2012, personal exemptions were not reduced based on a taxpayer's income. The 2012 Tax Act did not extend the provision in the Tax Code that eliminated the exemption phase-out. As a result, higher income taxpayers will see the value of their personal exemptions decreased and/or eliminated if their income exceeds certain thresholds.
  • Several Personal Tax Credits will be Extended. The $1,000 Child Tax Credit, the Enhanced Earned Income Tax Credit, and the Enhanced American Opportunity College Tuition Tax Credit are extended until 2017.
  • IRA Charitable Rollovers - Allowed for 2012 and 2013. Under the 2012 Tax Act, legislators extended the $100,000 "IRA Charitable Rollover" provision for 2012 and 2013. The IRA Charitable Rollover provision allows traditional IRA and Roth IRA owners aged 70½ or older the ability to distribute directly ("rollover") to certain public charities up to $100,000 per year without the distribution being included as taxable income, but allowing the distribution to count towards the annual mandatory withdrawal amount. Moreover, any qualified charitable distribution made prior to February 1, 2013 may be retroactively counted as if made on December 31, 2012. Further, taxpayers who have taken an otherwise qualifying distribution from an IRA after November 30, 2012 and before January 1, 2013 may transfer any portion of that distribution in cash to a qualifying charitable organization and elect to have that distribution treated as a 2012 qualified charitable distribution.

If you have questions and concerns on the 2012 Tax Act and how it may impact your taxes, please call one of the following tax attorneys at MacDonald Illig:

To ensure compliance with requirements imposed by the IRS, we inform you that any federal tax advice contained in this document, unless otherwise specifically stated, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in or accompanying this document.