American Taxpayer Relief Act of 2012
The fiscal cliff debate culminated in the passage of the American Taxpayer Relief Act of 2012 (ATRA) on January 3, 2012. ATRA makes permanent most of the tax cuts enacted in 2001 and 2003, permanently patches the alternative minimum tax, extends for five years the enhancements to individual income tax credits originally enacted in the 2009 stimulus legislation, and temporarily extends certain other tax provisions.
The Act includes provisions that:
- Extend permanently the 2001 and 2003 current individual income tax rates except for taxpayers with taxable income above a threshold amount ($450,000 for married individuals filing a joint return and $400,000 for single taxpayers)
- Repeal the personal exemption phase-out and the itemized deduction limitation for taxpayers with adjusted gross income at or below $300,000/$250,000 (joint filers/singles)
- Extend the current tax rates on capital gains and dividends except for taxpayers with taxable income above $450,000/$400,000 (joint filers/singles); for these taxpayers the capital gains and dividend tax rate is 20% (not including the 3.8% tax on investment income imposed by the Affordable Care Act, which takes effect on January 1, 2013)
- Provide permanent alternative minimum tax relief by increasing the exemption amount and indexing it for inflation
- Extend permanently the indexed estate, gift and generation-skipping transfer tax exemption of $5 million but increase the top rate to 40%
- Extend the 50% bonus depreciation of capital expenditures for one year, and increase section 179 expensing for one year
- Extend many expired provisions, through 2013; provisions that expired at the end of 2011, such as the research credit are extended retroactively from January 1, 2012
- The Act does not extend the 2% payroll tax reduction that had been in effect for two years.
Business Tax Provisions
The additional 50% first-year depreciation deduction for investment in "qualified property'* is extended for property placed in service in 2013. An additional year is allowed for certain long-production period property and certain aircraft. There is no change to the definition of "qualified property." The Act allows corporations to elect to take additional AMT credits in 2013 if they agree to forego the use of bonus depreciation on qualified property placed in service in those years and depreciate such property using the straight-line method. The additional credit (which is refundable) is limited to 6% of the amount of such credits that had been generated before 2006 and had not been used in tax years ending before April 1. 2008. Also, the additional credit cannot exceed $30 million.
Expensing of Certain Depreciable Property
The limitation on the amount of property that can be expensed under section 179 is increased to $500,000 for tax years beginning in 2013, with a phase-out beginning when the total amount of eligible section 179 property exceeds $2 million.
Extension of Expired General Business Provisions
- Research and development credit. The Act reinstates the research and development (R&D) credit retroactively from January 1, 2012, through December 31, 2013. The Act also modifies rules for taxpayers under common control and rules for computing the credit when a portion of a trade or business changes hands.
- Work opportunity tax credit. The Act extends the work opportunity tax credit (WOTC) for individuals who begin work for the employer prior to January 1, 2014.
- Depreciation of certain real property improvements. The Act extends retroactively from January 1, 2012, through December 31, 2013, the 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail store improvements, which are placed in service before January 1, 2014.
- Accelerated depreciation for business property on an Indian reservation. The Act extends for two years the placed-in-service date for the special depreciation recovery periods for qualified Indian reservation property to property placed in service before January 1, 2014.
- Indian Employment Credit. The Act extends retroactively from January 1, 2012 through December 31, 2013, the business tax credit for employers of qualified employees that work and live on or near an Indian reservation.
- Enhanced charitable deduction for contributions of food inventory. The Act extends for two years retroactively from January 1. 2012 through December 31, 2013, the provision allowing businesses to claim an enhanced deduction for the contribution of food inventory.
- Extension of special rule for S corporations making charitable contributions of property. The Act extends retroactively for tax years beginning after December through tax years beginning before January 1, 2014 the provision allowing S corporation shareholders to take into account their pro rata share charitable deductions even if the deductions would exceed the shareholder's adjusted basis in the S corporation.
Provisions Affecting Individual Taxpayers
- Marginal Individual Income Tax Rates. The Act extends permanently the 10%, 25%, 28%, 33%, and 35% individual income tax rate in effect in 2012 except for taxpayers with taxable income above a threshold amount for whom the rate will be 39.6%. The threshold amount is $450,000 for married individuals filing a joint return, $425,000 for individuals filing as head of household and $400,000 for single taxpayers. As under current law, the rate is indexed for inflation.
- Personal Exemption Phase Out and Itemized Deduction Limitation. The ACT repeals the personal exemption phase out and the limitation on itemized deductions for taxpayers with adjusted gross income ("AGI") at or below a certain threshold. The threshold is $300,000 for married individuals filing a joint return, $275,000 for head of household filers, and $250,000 for single individuals.
- Reduced Rates on Capital Gains and Dividends. The maximum tax rate of 15% (or $0 for those below the 25% bracket) on an individual's adjusted net gain is extended permanently, except that the rate will be 20% for taxpayers with incomes above a certain threshold. The threshold amount is $450,000 for married individuals filing a joint return, $425,000 for individuals filing as head of household and $400,000 for single taxpayers. Under the Act, an individual's qualified dividend income is taxed at the same rates (20%, 15%, 0%) that apply to adjusted net capital gain. Note that beginning 1/1/13, investment income of certain taxpayers is subject to an additional 3.8% tax imposed under the Affordable Care Act.
- Alternative Minimum Tax ("AMT"). The Act includes permanent AMT relief. The Act increases the AMT exemption amounts for 2012 to $78,750 (married individuals filing jointly) and $50,600 (single taxpayers). The AMT exemption is phased out when the alternative minimum taxable income exceeds certain thresholds. The Act also allows the offset of nonrefundable personal credits against the AMT. The AMT exemption amounts and phase-out threshold are indexed for inflation beginning in 2013.
- Roth Conversions for Retirement Plans. Unlike a traditional individual retirement account such as a 401(k) plan contributions to a Roth plan are not deductible for tax purposes and qualified distributions from the plan are not taxed. Generally, certain retirement plans such as a section 401(k) plan allow participants to convert their pre-tax accounts to Roth accounts in the plan, but only with respect to distributable amounts they can take out of the plan, usually because the participant has reached 591/2or separated from service. The Act allows any amount of a non-Roth account to be converted to a Roth account in the same plan, whether or not the amount is distributable. The amount converted would be subject to regular income tax.
The American Taxpayer Relief Act of 2012 (ATRA) enacted on January 3, 2012 makes permanent most of the tax cuts enacted in 2001 and 2003, permanently patches the alternative minimum tax, extends for five years the enhancements to individual income tax credits originally enacted in the 2009 stimulus legislation, and temporarily extends certain other tax provisions. Please contact us if you have questions concerning these 2012/2013 federal tax law changes or any other tax compliance or planning issues.
Paul J. Beckert MBA, CPA
Pinnacle Business Solutions
Data Source: Tax Policy Center, Urban Institute and Brookings Institution
Key Points of Interest
The limitation on the amount of property that can be expensed under section 179 is increased to $500,000 for tax years beginning in 2013
The Act extends permanently the 10%, 25%, 28%, 33%, and 35% individual income tax rate for individuals below the threshold
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