OUR THOUGHTS ON:

Tax Portion of Fiscal Cliff Averted for 99% of Taxpayers

Tax

By Ron Kramer

Early in the morning on January 1st, 2013, the Senate voted 89-8, to pass an amended version of H.R.8, the “American Taxpayer Relief Act of 2012.” The House had passed and sent the original H.R.8 to the Senate in September 2012, but the tax bill was never brought up for consideration by the Senate. As originally passed by the House, the Act would have extended the Bush-era tax rates for all taxpayers regardless of income level.

Late last evening the House passed H.R.8 by a vote of 257 to 167. Twice as many Democrats supported the bill as Republicans – with 172 Democrats in favor, compared with 85 Republicans. The bill will now become law, so the tax part of the fall from the fiscal cliff will be averted for 99% of taxpayers.

Now, as passed, the Act will prevent many of the tax hikes that were scheduled to go into effect on January 1 and would retain many tax breaks that were scheduled to expire on December 31. However, some high-income individuals will see an increase in their income taxes, and gift and estate taxes will slightly increase.

Some of the Act’s key changes follow:

Individual Tax Changes
Starting in 2013, the 10%, 15%, 25%, 28%, 33% and 35% tax brackets will remain in place. A new 39.6% rate will begin at the following thresholds:

  • Married Filing Jointly: $450,000 of taxable income
  • Qualifying Widow(er): $450,000 of taxable income
  • Head of Household: $425,000 of taxable income
  • Single: $400,000 of taxable income
  • Married Filing Separately: $225,000 of taxable income

The new tax rates were made permanent. They will not sunset like the Bush tax rates did.

Tax Rates on Long-Term Capital Gains and Dividends
The Act will raise the top rate for dividends and capital gains from 15% to 20% for taxpayers who would be subject to the new 39.6% bracket. The bill will save dividends from taxation at a taxpayer’s highest marginal ordinary tax rate (plus the 3.8% Medicare tax for high income individuals). H.R.8 retains the zero percent tax rate on long-term gains, modifies the 15% rate, and proposes a new 20% rate. Starting in 2013 the tax rates on long-term gains will be:

  • 0% if income falls below the 25% tax bracket
  • 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate
  • 20% if income falls in the 39.6% tax bracket

Alternative Minimum Tax
The Act provides a permanent patch to the alternative minimum tax (AMT). The retroactive AMT patch exemption amounts for 2012 are:

  • Married Filing Jointly: $78,750
  • Qualifying Widow(er): $78,750
  • Single: $50,600
  • Head of Household: $50,600
  • Married Filing Separately: $39,375

The bill also provides that these amounts be indexed for inflation after 2012.

Limitations on Itemized Deductions
The Pease limitations on the total amount of itemized deductions will be re-instated for 2013. Itemized deductions will be reduced by the lesser of 3% of the taxpayer's adjusted gross income (AGI) over the threshold amount, or by 80% of otherwise allowable itemized deductions. The threshold amounts at which itemized deductions would start to be limited are:

  • Married Filing Jointly: $300,000 of AGI
  • Qualifying Widow(er): $300,000 of AGI
  • Head of Household: $275,000 of AGI
  • Single: $250,000 of AGI
  • Married Filing Separately: $150,000 of AGI

These threshold amounts will be indexed for inflation for years after 2013.

Limitations on Personal Exemptions
The personal exemption phase-out (also called PEP), will be reinstated starting in 2013. Taxpayers will see their total personal exemptions reduced by two percent for each $2,500 (or fraction thereof) by which adjusted gross income exceeds the threshold. The threshold amounts for 2013 are:

  • Married Filing Jointly: $300,000 of AGI
  • Qualifying Widow(er): $300,000 of AGI
  • Head of Household: $275,000 of AGI
  • Single: $250,000 of AGI
  • Married Filing Separately: $150,000 of AGI

These threshold amounts will be indexed for inflation for years after 2013.
Please note that the Pease and PEP thresholds are lower than the thresholds for the 39.6% tax rate.

Deductions, Credits, and Income Exclusions
The following tax provisions will be extended through the end of the year 2017 (i.e. these provisions were not made permanent, but instead, have a five year expiration):

  • American Opportunity Credit
  • Child Tax Credit at $1,000 maximum and partially refundable
  • Earned Income Credit for 3 or more dependent

The following provisions will be extended through the end of 2013:

  • Educator expenses deduction
  • Exclusion for cancellation of debt on primary residences
  • Mass transit and parking benefits excluded from income set at maximum of $175 per month.
  • Mortgage insurance premium deduction
  • Deduction for state and local sales taxes
  • Charitable deduction for donating real property for conservation purposes
  • Tuition and fees deduction
  • Exclusion for charitable distributions from individual retirement accounts (special rules for make-up contributions for 2012)

Transfer Taxes
The Act will prevent steep increases in estate, gift and generation-skipping transfer (GST) tax that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation). However, the Act will also permanently increase the top estate, gift and GST rate from 35% to 40%.

Business Tax Extenders

Business tax breaks including 50% bonus depreciation, and the research and work opportunity tax credits would be extended. Other notable business tax extenders include:

  • Extension of new markets tax credit
  • Extension of railroad track maintenance credit
  • Extension of mine rescue team training credit
  • Extension of employer wage credit for employees who are active duty members of the uniformed services
  • Extension of work opportunity tax credit
  • Extension of qualified zone academy bonds
  • Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
  • Extension of 7-year recovery period for motorsports entertainment complexes
  • Extension of accelerated depreciation for business property on an Indian reservation
  • Extension of enhanced charitable deduction for contributions of food inventory
  • Extension of increased expensing limitations and treatment of certain real property as section 179 property
  • Extension of election to expense mine safety equipment
  • Extension of special expensing rules for certain film and television productions
  • Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico
  • Extension of modification of tax treatment of certain payments to controlling exempt organizations
  • Extension of treatment of certain dividends of regulated investment companies
  • Extension of RIC qualified investment entity treatment under FIRPTA
  • Extension of subpart F exception for active financing income
  • Extension of look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules
  • Extension of temporary exclusion of 100 percent of gain on certain small business stock
  • Extension of basis adjustment to stock of S corporations making charitable contributions of property
  • Extension of reduction in S-corporation recognition period for built-in gains tax
  • Extension of empowerment zone tax incentives
  • Extension of tax-exempt financing for New York Liberty Zone
  • Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands
  • Modification and extension of American Samoa economic development credit
  • Extension and modification of bonus depreciation


Energy Tax Extenders
The bill also contains the following energy tax extenders:

  • Extension of credit for energy-efficient existing homes
  • Extension of credit for alternative fuel vehicle refueling property
  • Extension of credit for 2- or 3-wheeled plug-in electric vehicles
  • Extension and modification of cellulosic biofuel producer credit
  • Extension of incentives for biodiesel and renewable diesel
  • Extension of production credit for Indian coal facilities placed in service before 2009
  • Extension and modification of credits with respect to facilities producing energy from certain renewable resources
  • Extension of credit for energy-efficient new homes
  • Extension of credit for energy-efficient appliances
  • Extension and modification of special allowance for cellulosic biofuel plant property
  • Extension of special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities
  • Extension of alternative fuels excise tax credits


Other Items

The Act also extends unemployment insurance and many health related provisions, as well as providing the doc fix and an extension of farm legislation. And, important note, the bill does not extend the 2% payroll tax cut into 2013.

H.R.8 does not address the other two serious aspects of the fiscal cliff, namely the significant scheduled budget cuts due to Sequestration and the immediate need to address the debt ceiling and control government spending and entitlements. These battles will be shaping up as the new Congress is sworn in on January 3.

© 2012 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter

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