At approximately 1:30 a.m. on January 1, 2013, the Senate passed a bill to avoid the fiscal cliff by a vote of 89 to 8.  This bill, titled the American Taxpayer Relief Act of 2012, then went before the House and was passed later that evening by a vote of 257 to 167.  The “compromise” does not address any of the spending cuts required by the sequester.  These are merely postponed for a couple of months to be addressed by the 113th Congress.  Therefore, one of the final actions of the 112th Congress was to address the more time sensitive issue of the Bush tax cuts which officially expired on December 31, 2012.

The key provisions of the American Taxpayer Relief Act of 2012 are as follows:

Income Tax

  • The Bush-era tax cuts from 2001 and 2003 have been permanently extended for married taxpayers earning less than $450,000 ($400,000 for single taxpayers);
  • The top ordinary income tax rate returns to 39.6% (from 35%) for married taxpayers earning $450,000 ($400,000 for single taxpayers);
  • The top tax rate for capital gains and qualified dividends increases to 20% (from 15%) for taxpayers in the 39.6% bracket; and
  • The phase-out of personal exemptions and the overall limitation on itemized deductions are reinstated for married taxpayers earning over $300,000 ($250,000 for single taxpayers).

 Estate/Gift/GST Tax

The unified exemption remains at $5,000,000 (indexed for inflation estimated at $5,250,000 for 2013);

  • Surviving spouses will continue to have the ability to utilize any unused exemption from the deceased spouse, known as spousal portability; and
  • The top estate/gift/GST tax rate increases to 40% (from 35%).

 AMT

An exemption patch is applied retroactively for 2012 and a permanent inflation adjustment to the exemption will be applied going forward.

Tax Extenders through 2013

One of the most anticipated extenders was the income exclusion of direct charitable contributions of up to $100,000 of IRA assets for taxpayers 70 ½ and older.  This has been extended through 2013.  Yes, you read that correctly.  On January 1, 2013, Congress extended your ability to use up to $100,000 of your RMD as a qualified charitable distribution for the 2012 tax year.  Currently the language in the bill allows the following relief for taxpayers who have already taken their RMD for 2012:

“any portion of a distribution from an individual retirement account to the taxpayer after November 30, 2012 and before January 1, 2013, may be treated as a qualified charitable distribution to the extent that –

such portion is transferred in cash after the distribution to a qualified charitable organization before February 1, 2013”

The other key extender through 2013 is the election to deduct state and local sales taxes in lieu of state income taxes.

Expiring Tax Provisions

Effective January 1, 2013, the employee’s portion of the FICA payroll tax will return to 6.2% (from 4.2%) on earnings up to $113,700.

We expect more details to be released regarding the above in the upcoming weeks.  Please consult your tax advisor.

2013 Reminders – Unrelated to New Bill

New Taxes for 2013
In addition to the tax changes above, beginning January 1, 2013, the 2010 Health Care Reform Legislation increases the Medicare payroll tax on high wage earners by 0.9% to 2.35% (from 1.45%) and also creates the new 3.8% Medicare contribution tax on the unearned income of high-income individuals.  Please review our 2012 Year-End Planning Considerations for a complete analysis of the new taxes imposed by the 2010 Health Care Reform Legislation.

Gift Exclusion is Inflation-Adjusted for 2013
The annual exclusion for gifts will increase to $14,000 per person.

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