“I want everyone to know that I’m willing to get this done, but I need a dance partner.”
-Senate Minority Leader Mitch McConnell in a Senate Floor Speech, December 30, 2012
In a flurry of activity around the New Year’s holiday, Congress in part averted the much touted “Fiscal Cliff” – the series of expiring tax cuts and sharp governmental spending reductions that would have taken effect on January 1, 2013. In the early hours of January 1, 2013, the Senate passed the American Taxpayer Relief Act of 2012 (ATRA) by a vote of 89 to 8. Thereafter, after a flurry of party caucuses on New Years Day, the House of Representatives passed ATRA by a vote of 257 to 167. President Obama is expected to sign the Act.
Here is a quick summary of ATRA’s major tax provisions:
Tax Rates. Beginning in 2013, for married taxpayers with incomes greater than $450,000 and single taxpayers with incomes greater than $400,000, the tax rate on the portions of their incomes greater than those threshold amounts will be 39.6%. For taxpayers with incomes lower than the threshold amounts, the tax rates in effect for 2012 and prior years will be made permanent. Hence, the top income tax rates return to those that were in effect during the Clinton presidency, albeit at much higher income levels than if the “Fiscal Cliff” had become a reality.
Tax on Capital Gains & Dividends. ATRA includes a permanent extension of current capital gains and dividend rates for individuals and married couples earning less than the $400,000/$450,000 thresholds mentioned above. For taxpayers with incomes greater than those thresholds, the tax return on capital gains and dividends will return to a 20% rate. This does not include the new 3.8% Medicare surtax taking effect in 2013, which in general will impact single taxpayers with incomes over $200,000 and married couples with joint incomes over $250,000. Hence, the top federal tax rate on capital gains and dividends earned by some taxpayers will be 23.8%.
Estate & Gift Taxes. The current $5 million exemption levels for estate, gift, and generation skipping transfer (GST) taxes will be made permanent. As indexed for inflation, the exemption levels are expected to be $5.25 million for 2013. In a compromise between Republicans (who wanted to keep the current 35% tax rate on estate and gift taxes) and Democrats (who wanted the rates to rise to 45%), the parties “split the difference” and increased the top estate, gift, and GST tax rates to 40%.
Alternative Minimum Tax (AMT). The AMT was passed in 1982 to ensure that wealthy Americans didn’t use tax loopholes to avoid paying a certain amount of income taxes. Because the original income levels under the AMT provision were not indexed for inflation, the AMT needed to be continually “patched” as the years have gone by to prevent the AMT from impacting middle-class taxpayers. ATRA includes a provision which will permanently “patch” the AMT.
Limitations on Itemized Deductions & Personal Exemptions. ATRA restores to the Tax Code previously-repealed limitations on itemized deductions and personal exemptions. These limitations will effectively reduce the amount of itemized deductions and personal exemptions that can be utilized for single taxpayers with incomes greater than $250,000 and married taxpayers with incomes in excess of $300,000.
Expiration of Payroll Tax “Holiday”. The provisions of ATRA do not include an extension of the prior law’s provisions which reduced the employee portion of social security payroll taxes from 6.2% to 4.2%. Hence, the 6.2% will apply to all wages paid in 2013 and years thereafter.
WealthLawBlog.com will continue to follow these developments and other important tax and legal issues.
