Fiscal Cliff Tax Act

Summarized from an AICPA article by Paul Bonner and Alistair M. Nevius

With some modifications targeting the wealthiest Americans with higher taxes, the American Taxpayer Relief Act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). It also permanently takes care of Congress’s perennial job of ‘patching’ the alternative minimum tax (AMT). It temporarily extends many other tax provisions that had lapsed at midnight on Dec. 31 and others that had expired a year earlier.

Among the tax items not addressed by the act was the temporary lower 4.2% rate for employees’ portion of the Social Security payroll tax, which was not extended and has reverted to 6.2%. If you need further assistance make sure you contact us to answer all of your tax questions.

Here are the act’s main tax features:

Individual tax rates – All the individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly.

Phaseout of itemized deductions and personal exemptions – phaseout is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.

Capital gains and dividends – 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.

Alternative minimum tax – exemption amount permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers.

Estate and gift tax – exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax portability election was made permanent by the act.

Permanent extensions of various temporary tax provisions

  • Marriage filing jointly penalty relief
  • The liberalized child and dependent care credit rules
  • Expanded adoption credit and adoption-assistance program amounts
  • The higher contribution amount to Coverdell education savings accounts
  • The employer-provided child care credit
  • Others (see original AICPA article)

Individual credits expired at the end of 2012

The American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2017 as well as enhanced provisions of the child tax credit under and the earned income tax credit. In addition, the bill permanently extends a rule excluding from taxable income refunds from certain federal and federally assisted programs.

Individual provisions expired at the end of 2011

The act also extended through 2013 a number of temporary individual tax provisions, most of which expired at the end of 2011:

  • Deduction for educator expenses
  • Exclusion of discharge of qualified principal residence indebtedness
  • Mortgage insurance premiums treated as qualified residence interest
  • Deduction of state and local general sales taxes
  • Special rule for contributions of capital gain real property made for conservation purposes
  • Above-the-line deduction for qualified tuition and related expenses
  • Tax-free distributions from individual retirement plans for charitable purposes
  • Others (see original AICPA article)

Business tax extenders through 2013

  • Credit for increasing R & D activities including modification for more inclusion
  • Increased expensing amounts under Sec. 179
  • 50% first-year bonus depreciation
  • Work opportunity tax credit
  • Enhanced charitable deduction for contributions of food inventory
  • Temporary exclusion of 100% of gain on certain small business stock
  • Basis adjustment to stock of S corporations making charitable contributions of property
  • Reduction in S corporation recognition period for built-in gains tax
  • Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
  • Others (see original AICPA article)

Energy tax extenders extended through 2013

  • Credit for energy-efficient existing homes, new homes and appliances
  • Alternative fuels excise tax credits
  • Incentives for biodiesel and renewable diesel
  • Others (see original AICPA article)

New taxes – took effect Jan. 1 as a result of 2010?s health care reform legislation.

Additional hospital insurance tax on high-income taxpayers – employee portion of Medicare withholding which is normally 1.45% of wages, is increased by 0.9% on combined wages that exceed the?$250,000 threshold amount for joint or surviving spouse filers and $200,000 for single filers.

For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount.

Medicare tax on investment income. Sec. 1411 imposes a tax on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income (AGI) exceeds a threshold amount. For estates and trusts, the tax equals 3.8% of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins.

For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000 and it is $200,000 for singles and head of households.

Net investment income means investment income reduced by allowable deductions. Investment income includes income from interest, dividends, annuities, royalties, and rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business.

Medical care itemized deduction threshold –threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI. There is an exemption from the 10% floor for taxpayers turning 65?in the years 2013?2016.

Health flexible spending arrangement. Effective for cafeteria plan years beginning after Dec. 31, 2012, the maximum annual amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement is $2,500.

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