Key Tax Provisions of the American Taxpayer Relief Act of 2012

In the Press · January 7, 2013

Now that the president has
signed into law the American Taxpayer Relief Act of 2012 (ATRA), it appears we
have landed on a ledge near the top of the fiscal cliff. ATRA raises the tax
rate on the nation’s highest earners while also extending many tax cuts for
individuals and businesses. Specifically, ATRA provides the following:

Individual Taxes

  • The
    top marginal tax rate has been raised from 35% to 39.6% on married couples
    earning more than $450,000 ($400,000 for single filers); these thresholds
    have been indexed for inflation.
  • The
    tax rate on capital gains and qualified dividends has increased from 15%
    to 20% on those taxpayers in the 39.6% tax bracket (further increased to
    23.8% with the inclusion of the Medicare surtax as described below).
  • The
    2001 and 2003 tax cuts have been permanently extended for taxpayers below
    the 39.6% tax bracket (meaning all marginal rates below the top rate
    remain as is).
  • The
    payroll and self-employment tax (which reverts to 6.2% from 4.2% at the
    beginning of 2013) was not addressed by ATRA and will increase as
    scheduled. 
  • The
    phaseout of personal exemptions and itemized deductions for married
    couples earning above $300,000 ($250,000 for single taxpayers) has been
    permanently reinstated. The phaseout will not apply to taxpayers below
    these thresholds.
  • The
    Alternative Minimum Tax (AMT) was patched for 2012, and the exemption
    amount has been permanently adjusted for inflation going forward.
  • The
    American Opportunity Tax Credit for higher education and special relief
    for families with three or more children has been extended for five years
    (through 2018).
  • Many individual tax benefits have
    been temporarily extended through 2013, including the tax-free
    distribution from IRA accounts for charitable purposes.    

Also of note, beginning in 2013,
the Patient Protection and Affordable Care Act imposes a 3.8% surtax on passive
income and an additional .9% surtax on wages and self-employment income in
addition to current Social Security and Medicare taxes. The amount subject to
the 3.8% surtax is the lesser of net investment income or the excess of
modified adjusted gross income over $250,000 for taxpayers married filing
jointly ($200,000 for single filers). The .9% surtax will apply to earned
income above the same thresholds.  

Estate Taxes 

  • The
    current estate tax exemption has been maintained at $5 million per person
    and remains indexed for inflation (resulting in an exemption of $5.25
    million in 2013).
  • The
    gift tax and generation skipping tax exemptions remain coupled with the
    estate tax exemption and are also indexed for inflation ($5.25 million in
    2013).
  • The
    top estate tax rate has increased from 35% to 40%.
  • The
    portability of one spouse’s unused exemption to another spouse is now made
    permanent.

Business
Taxes

  • The
    50% bonus depreciation has been extended through the end of 2013.
  • The
    Section 179 asset expensing has been extended through 2013 and remains at
    $500,000.
  • The
    100 % exclusion for capital gains from qualified small business stock has
    been extended through 2013.
  • Many
    business tax credits that expired at the end of 2011 have been extended
    through 2013, including the research credit, the new markets credit, and
    the work opportunity credit, among others. 

We expect that further reforms to the tax code will take place
over the next six weeks, as negotiations continue over the postponed
sequestration cuts and the increase in the nation’s debt ceiling . It is
likely, however, that any further tax reform will be additional revisions or
extensions of current tax provisions, rather than wholesale tax reform. It
remains to be seen just how treacherous the next step off the ledge might be.

For more information or
questions about ATRA, the fiscal cliff, or any corporate business matter,
please contact Serge
O. Bechade
, the author of this alert, or Corporate
Practice Group
partner Robert
P. Maloney
. You can reach Serge at 617 456 8016 or sbechade@princelobel.com, and Bob at 617 456 8008
or rmaloney@princelobel.com.