Summary of American Taxpayer Relief Act
Passed by Congress on January 1, 2013 and signed by President Obama on January 2nd, this last minute legislation provides the following:
• Business Tax Breaks Retroactively Reinstated and Extended
• Individual Tax Breaks Retroactively Reinstated and Extended
• Estate and Gift Tax Relief
• Energy Related Tax Provisions Extended
Here are some of the key provisions related to Individual Income taxpayers:
Reduced Tax Rates
Under the new law, for tax years beginning after 2012, the ATRA provides that the income tax rates for most individuals will remain the same at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6%). However, a 39.6% tax rate will apply to taxable income above a certain threshold, specifically taxable 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 for married taxpayers filing separately.
Reduced Capital Gains and Qualified Dividends Rate except for Higher Income Taxpayers
This act provides that the top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with taxable income exceeding the limitations as listed above. Prior to this new legislation, dividends were scheduled to be taxed at ordinary income tax rates, with no favorable tax breaks. Note, that for all taxpayers above a certain income threshold, there will be a Medicare surcharge of 3.8% on income so the effective rate on capital gains and dividends will be 23.8%. This applies to those with Modified Adjusted Gross Income above $250,000 for joint filers or surviving spouses and $200,000 for single or head of household filers.
Permanent AMT Patch
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 AMT rate of 26% or 28%.
Under pre-Act law, the AMT exemption amounts for 2012 were:
$45,000 for married couples
$33,750 for unmarried individuals
$22,500 for married couples filing separately
With the new law, the Act permanently increases the AMT exemption amounts. As a result, the AMT exemption amounts for tax years beginning after 2011 are as follows:
$78,750 for married individuals filing jointly and surviving spouses,
less 25% of AMTI exceeding $150,000 (zero exemption when AMT income
reaches $465,000)
$50,600 for unmarried individuals, less 25% of AMTI exceeding $112,500
(zero exemption when AMT income reaches $314,900)
$39,375 for married couples filing separately less 25% of AMTI exceeding $75,000
(zero exemption when AMT income reaches $232,500)
In addition, these amounts will be indexed for inflation for tax years after 2012 (there was no previous provision for inflation adjustments!)
Personal nonrefundable credits may now offset AMT and regular tax for all years and allows an individual to offset his entire regular tax liability and AMT liability with these types of personal credits,
Expanded American Opportunity Tax Credit Extended
The AOTC was a modified version of the Hope Credit allowing eligible taxpayers to claim a credit equal to 100% of the first $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), for tax years beginning in 2009 and 2010. This was set to reduce to only $1,000 in 2013, but the new law extends the provision to 2018.
Various Child Tax Credit Provisions Made Permanent or Extended
The Child Tax Credit (CTC) allows taxpayers to claim a tax credit for each qualifying child under age 17 that the taxpayer can claim as a dependent. The CTC phases out when a taxpayer's income exceeds certain thresholds. This credit was set to drop from $1,000 to $500 after 2012 and not be refundable, but the new law extends the credit permanently and allows it to apply to AMT and be refundable through 2018.
Certain Earned Income Tax Credit Rules Extended
Certain low-income workers are allowed a refundable Earned Income Tax Credit (EITC). An eligible individual is allowed a credit against his or her tax for the tax year in an amount equal to the credit percentage of so much of the taxpayer's earned income for the tax year as doesn't exceed the earned income amount. This depends on the number of qualifying children that the taxpayer has. The credit had been expanded to be about 45% for eligible taxpayers with three or more children. Now the new law extends these provisions to 2018, instead of expiring in 2013.
• Business Tax Breaks Retroactively Reinstated and Extended
• Individual Tax Breaks Retroactively Reinstated and Extended
• Estate and Gift Tax Relief
• Energy Related Tax Provisions Extended
Here are some of the key provisions related to Individual Income taxpayers:
Reduced Tax Rates
Under the new law, for tax years beginning after 2012, the ATRA provides that the income tax rates for most individuals will remain the same at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6%). However, a 39.6% tax rate will apply to taxable income above a certain threshold, specifically taxable 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 for married taxpayers filing separately.
Reduced Capital Gains and Qualified Dividends Rate except for Higher Income Taxpayers
This act provides that the top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with taxable income exceeding the limitations as listed above. Prior to this new legislation, dividends were scheduled to be taxed at ordinary income tax rates, with no favorable tax breaks. Note, that for all taxpayers above a certain income threshold, there will be a Medicare surcharge of 3.8% on income so the effective rate on capital gains and dividends will be 23.8%. This applies to those with Modified Adjusted Gross Income above $250,000 for joint filers or surviving spouses and $200,000 for single or head of household filers.
Permanent AMT Patch
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 AMT rate of 26% or 28%.
Under pre-Act law, the AMT exemption amounts for 2012 were:
$45,000 for married couples
$33,750 for unmarried individuals
$22,500 for married couples filing separately
With the new law, the Act permanently increases the AMT exemption amounts. As a result, the AMT exemption amounts for tax years beginning after 2011 are as follows:
$78,750 for married individuals filing jointly and surviving spouses,
less 25% of AMTI exceeding $150,000 (zero exemption when AMT income
reaches $465,000)
$50,600 for unmarried individuals, less 25% of AMTI exceeding $112,500
(zero exemption when AMT income reaches $314,900)
$39,375 for married couples filing separately less 25% of AMTI exceeding $75,000
(zero exemption when AMT income reaches $232,500)
In addition, these amounts will be indexed for inflation for tax years after 2012 (there was no previous provision for inflation adjustments!)
Personal nonrefundable credits may now offset AMT and regular tax for all years and allows an individual to offset his entire regular tax liability and AMT liability with these types of personal credits,
Expanded American Opportunity Tax Credit Extended
The AOTC was a modified version of the Hope Credit allowing eligible taxpayers to claim a credit equal to 100% of the first $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), for tax years beginning in 2009 and 2010. This was set to reduce to only $1,000 in 2013, but the new law extends the provision to 2018.
Various Child Tax Credit Provisions Made Permanent or Extended
The Child Tax Credit (CTC) allows taxpayers to claim a tax credit for each qualifying child under age 17 that the taxpayer can claim as a dependent. The CTC phases out when a taxpayer's income exceeds certain thresholds. This credit was set to drop from $1,000 to $500 after 2012 and not be refundable, but the new law extends the credit permanently and allows it to apply to AMT and be refundable through 2018.
Certain Earned Income Tax Credit Rules Extended
Certain low-income workers are allowed a refundable Earned Income Tax Credit (EITC). An eligible individual is allowed a credit against his or her tax for the tax year in an amount equal to the credit percentage of so much of the taxpayer's earned income for the tax year as doesn't exceed the earned income amount. This depends on the number of qualifying children that the taxpayer has. The credit had been expanded to be about 45% for eligible taxpayers with three or more children. Now the new law extends these provisions to 2018, instead of expiring in 2013.