American Taxpayer Relief Act of 2012 (HR8 as amended by the Senate)
The first two items below directly affect nearly every taxpayer. The third affects anyone with earned income, and the fourth affects every married couple. The rest are much narrower in scope (ie. highest income folks, large estates, etc):
All Bush-era tax rates made *permanent* (10, 15, 25, 28, 22, 35% brackets). New 39.6% bracket starting at 400/450,000 (s/mfj) of *taxable income* (not AGI or MAGI).
15% dividend and cap-gains tax rates made permanent, 20% for Taxable Income >; 400/450. 20% rate applies to the extent that cap-gains and dividends exceed the 400/450 cap. (ie. if marrieds have $425 ord. income, plus $100 div/capgains, then they pay 15% on the first $25 of divs/capgains and 20% on the remainder. Plus Obamacare taxes).
Temporary OASDI (SS tax) cut was allowed to expire. For 2012, the employee portion of social security taxes was cut to 4.2%. It now goes back to 6.2% on all earned income up to $113,700. This affects *everyone* with earned income.
Marriage Penalty relief — basic MFJ standard deduction remains twice the basic deduction for singles. Similarly, the 15% bracket remains twice the 15% single bracket.
Obamacare medicare tax on “net investment income” still applies – 3.8% on investment income to the extent that taxable income exceeds $200/250.
AMT patch for 2012 increases 2012 AMT exemptions to $50,600/$78,750, and for 2013 at $51,900/$80,750 — and indexed for inflation in the future so they don’t have to play the game of annual AMT patches. AMT has *never* been indexed to inflation automatically before, which is why they had to pass a patch each year.
Revival of Pease and PEP == or “How to make marginal tax rates higher than they look while adding entirely unnecessary complexity to the tax code”
“Pease” comes back, but with new thresholds, not just inflation-adjusted versions of the old ones which the Bush tax cuts suspended. Under Pease, itemized deductions start to phase out for $250/$300 AGIs, and will be adjusted for inflation going forward. Pease phaseouts of itemized deductions exempt some specific deductions: medical expenses (which now have a 10% threshold anyway), investment interest, casualty, theft, or gambling losses (which can only offset gambling gains anyway). Pease reduces itemized deductions (other than those exceptions) by 3% of AGI above the thresholds, but not by more than 80%.
Example: MFJ, AGI=$400,000. AGI exceeds the threshold by $100,000, so itemized deductions are reduced by $3,000. If this person earns an additional $1000, but itemized deductions are otherwise the same, not only is that $1000 taxed at the margin, but, so, too are his deductions reduced by an additional $30 — ie. he gets taxed as if he’d earned $1030, not $1000. At the 35% bracket, that means that his effective marginal tax rate is not 35%, but rather 36.05%. Mathematically, this means that anyone above the Pease threshold actually has a marginal tax rate 3% higher than the “official” marginal tax rate (at least until they’ve disallowed the full 80% of their itemized deductions, which may happen to the ultra-high-income folks, but is not likely for anyone else).
PEP – the Personal Exemption Phaseout – comes back, like Pease, with new thresholds (same as Pease: $250/300). Personal exemptions are reduced by 2% of each $2500 (or portion thereof) by which the taxpayer’s AGI exceeds the threshold.
Federal Estate, Gift and Generation-Skipping-Transfer (GST) Taxes
Marginal rate goes to 40% (from current 35%), for estates >; $5,000,000. Portability between spouses is now permanent. (“DSUE” = Deceased Spousal Unused Exclusion). The lack of such portability, until 2010, was a major incentive for folks to set up trusts in their estate plans. Trusts may still be advised – but they are not strictly necessary anymore to make maximum use of an individual’s estate tax exclusion.
The federal estate tax deduction for state estate taxes has been extended.
$5,000,000 exclusion applies united to lifetime gift and estate taxes.
State and Local sales tax deduction as an itemized deduction on federal income taxes has been extended. This helps folks in states with sales taxes but without state income taxes.
Child Tax Credit – permanently extended at the $1000 level (was scheduled to go down to $500). Not adjusted for inflation, though.
Adoption Credit/Assistance – permanently extended.
Child and Dependent Care Credit – permanently extended with up to 35% credit rate, on qualifying expenses of up to $3000/$6000. Phaseout starts at $15,000 of AGI, rather than $10,000 as was scheduled to happen. Credit rate reduces down to 20% for folks above top threshold.
American Opportunity Tax Credit (extended to 2017) for qualified tuition and related expenses. Often better than the HOPE credit (which is already permanent).
Above-the-line deduction for qualified tuition and related expenses — expired after 2011, back now, extended to Dec 31, 2013. Deduct up to $4000 for taxpayers whose MAGI <; $65,000/$130,000. (Cannot be claimed in same year as HOPE or AOTC)
Student Loan Interest Deduction – now permanent suspension of the 60 month rule for the $2500 of above-the-line student loan interest deduction, expands the range of the phaseout.
Extends through 2013 the deduction for teachers classroom expenses.
Extends through 2013 the exclusion of “cancellation of indebtedness on principal residence” income. (For folks who lose their home through foreclosure who would otherwise have phantom income due to banks canceling their debts).
IRA distributions direct to charity are tax-free (rather than being income and then available as potential itemized deductions — which would have meant higher AGI, other impacts).
Various business tax incentives, extensions, most notably “section 179” small business expensing limit at $500,000 rather than the $125,000 it would have fallen to) and “bonus depreciation”.
On the spending side, “sequestration” has been delayed by 2 months.
[This is based mainly on notes provided by CCH tax services. This is highly preliminary. Be sure to check for changes, adjustments, etc.]
[fixed an example calculation.]
You forgot — probably because they don’t apply to individual client taxpayers — the list of “goodies” included in this bill, items that will deny revenue to the Treasury and thus not contribute to reducing the deficit.
Actually, I do mention one of them – the “bonus depreciation”. But there are a lot more such goodies than those 8, including tax credits to individuals who make “energy efficiency” improvements to their homes, production credits for facilities which generate wind energy, credits for biodiesel, cellulosic biofuels, alternative fuel vehicle refueling properties, tax credits for ethanol, special rule for contribution of real property for conservation (which provides a double-benefit for the generally very rich folks who donate part of their property – they get a big tax break *and* the remaining property goes up in value since it’s next to conservation property).
It increases the deficits enormously, didn’t do anything about the biggest “tax expenses” (tax breaks and deductions which “cost” the treasury the most) doesn’t do a thing about spending. Moreover, it likely derails any chance for real, comprehensive tax reform.
My intention here is not to judge the law, but rather to be informative as to how it immediately will affect taxpayers.