Did “Sleep-Deprived Octogenarians” drop the New Year’s Ball on You?

Maybe. Maybe not.

Happy New Year… from Perkins & Co and from the US Congress. The House and Senate have both passed (and President Obama will soon sign or has already signed) the American Taxpayer Relief Act of 2012. Unless you’ve been staying away from all news sources in a highly disciplined manner, you likely already know that:

  • It raises marginal tax rates on the ordinary income of joint filers with taxable income greater than $450,000 (single filers >$400,000) from 35% to the old top rate of 39.6%. Note that this rate kicks in for taxable income of $450,000 – which means you can first subtract all deductions from your earnings to see if you will exceed this threshold. But be warned – this top rate does not include the 0.9% and 3.8% Medicare surtaxes imposed by healthcare reform that we discussed in our prior post – so some taxpayers may see some of their income taxed at a federal rate as high as 43.4%.
  • It keeps the tax rate on dividends tied to the capital gains tax rate, which increases to 20% from 15% for these “high income” taxpayers.
  • It permanently keeps income tax rates for everyone else at the same levels we’ve seen since 2006 – a top rate of 35%, with dividends and capital gains taxed at (at most) 15%.
  • It re-imposes limitations on individual itemized deductions and individual exemptions for higher-income individuals, but the limitations, last seen in 2009, kick in at higher thresholds than they used to.
  • It did not extend the payroll tax cut, so anyone receiving a paycheck will see their take-home pay decrease in 2013.
  • It did permanently patch the AMT exemption and indexed it for inflation. Much needed, long overdue, and a bit of a surprise!
  • It did permanently raise the lifetime estate & gifting exclusions to $5,000,000 (indexed for inflation), set the estate and gift tax rates at 40%, and maintained the ability for a surviving spouse to utilize the other spouse’s unused exemption (“portability”). This exceeds most commentators’ expectations for permanent estate tax relief, which had long been predicted at $3.5M and 45%.

Other highlights include:

  • All of the recent taxpayer-favorable depreciation rules have been extended for 2012 and 2013: 50% bonus depreciation, a $500,000 §179 expensing limit (with $2M phase-out threshold), qualified leasehold, retail and restaurant property can be depreciated over a shorter 15-year tax life, and $250,000 of real property improvements can also be expensed under §179. A bit odd to see some of these retroactively extended for 2012 – it’s not like they’ll stimulate capital purchases in 2012 at this point.
  • The R&D credit was extended for 2012 and 2013.
  • Some recent taxpayer-favorable individual tax provisions were extended, including a 5 year extension of the best of the education credits (the American Opportunity Tax Credit); and a retroactive-to-2012 plus 1-year extension through 2013 for all of these: itemized deduction allowed for state & local sales taxes instead of state income taxes, nontaxable distribution from IRA directly to a qualified charity, the tuition and fees deduction, and the nontaxable forgiveness of qualified principal residence indebtedness.

This isn’t the full impact of the law – there are many other tax provisions, as well as significant non-tax provisions affecting unemployment insurance, Medicare reimbursement rates for physicians, and the price of milk… but we think these are the ones that are of greatest interest to the majority of our clients. Let us know if you’d like to know more!

Want to review these provisions and how they’ve changed since 2009? Take a look at, What’s the Law When (January 2013) a resource we use to remind ourselves, since who the heck could remember all of this otherwise? This 2012 Act is designated by a D in the right-most column.  You’ll see that nearly every item listed was affected.