On January 2, 2013 President Barack Obama signed into law the American Taxpayer Relief Act of 2012 (ATRA). Passage of this Act averted the so-called “fiscal cliff” and made “permanent” changes to the tax code. As with all Congressional legislation, however, no change is truly permanent and several components of the legislation have already changed. Other provisions may change in the future.
In a nutshell, the ATRA extended specific provisions of two major Bush-era tax bills, the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs Growth Tax Relief Reconciliation Act of 2003. A compromise measure, the Act gives permanence to the lower rate of much of the Bush tax cuts, while retaining the higher tax rate at upper income levels that became effective as a result of the expiration of the Bush tax cuts.
The following is a summary of some of the major tax provisions of the Act:
A. INDIVIDUAL INCOME TAX RATES
The American Taxpayer Relief Act of 2012 retained the 10%, 15%, 25%, 28%, and 33% income tax brackets. The 35% tax bracket ends at $400,000 for single filers. Above this threshold, there’s a new 39.6% tax bracket. Thresholds for the new 39.6% bracket for are indexed to inflation and increased for tax year 2014.
|Filing Status||Tax Year 2013||Tax Year 2014|
|Head of Household||$425,000||$432,200|
|Married Filing Jointly||$450,000||$457,600|
|Married Filing Separately||$225,000||$228,800|
B. CAPITAL GAINS RATE
The American Taxpayer Relief Act of 2012 retained the 0% and 15% tax rates on qualified dividends and long-term capital gains, and added a new 20% tax rate that applies to taxpayers who fall within the new 39.6% tax bracket. Which capital gains tax rate will apply depends on what tax bracket a person is in. The capital gains tax rates for 2013, 2014 and future years are:
o 0% of capital gains income if a person is in the 10% and 15% tax brackets;
o 15% of capital gains income if a person is in the 25%, 28%, 33%, or 35% tax brackets; and
o 20% of capital gains income if a person is in the 39.6% tax bracket.
C. ALTERNATIVE MINIMUM TAX
The American Taxpayer Relief Act of 2012 provided the following AMT exemption amounts, to be annually indexed for inflation:
|Filing Status||Tax Year 2012||Tax Year 2013||Tax Year 2014|
|Head of Household||$50,600||$51,900||$52,800|
|Married Filing Jointly||$78,750||$80,800||$82,100|
|Married Filing Separately||$39,375||$40,400||$41,050|
D. ESTATE TAX RATES
The American Taxpayer Relief Act extended the $5 million exclusion, indexed to inflation. For tax year 2014, the estate tax exclusion is $5,340,000. The top tax rate for estates is 40%.
E. PEASE LIMITATION
The American Taxpayer Relief Act resulted in reinstatement of the so-called “Pease Limitation” that caps the amount of itemized deductions high income earners are able to take. Under the law, itemized deductions are limited for the following taxpayers at levels indexed to inflation:
|Filing Status||Tax Year 2013||Tax Year 2014|
|Head of Household||$275,000||$279,650|
|Married Filing Jointly||$300,000||$305,050|
|Married Filing Separately||$150,000||$152,525|
F. PERSONAL EXEMPTION PHASEOUT
The American Taxpayer Relief Act also phases out the amount of the personal exemption high earners are entitled to take. The total amount of exemptions a taxpayer may take is reduced under the new law by two percent for each $2,500 or portion thereof over which the taxpayer’s adjusted gross income exceeds specific levels, annually indexed for inflation. For 2014, the levels at which the phase-out begin are the same as the Pease limitation (e.g. $254,200 for single filers).
G. SOCIAL SECURITY TAX
By not addressing the issue at all, the American Taxpayer Relief Act allowed the temporary, two-year reduction in payroll tax of 2% to expire.
H. MISCELLANEOUS PROVISIONS
The Act contained numerous other provisions relating to both tax deductions and tax credits. While some of these provisions are still active in tax year 2014, a number of provisions and deductions expired at the end of 2013 and have not been renewed. It is very possible Congressional action in the second half of 2014 will reinstate several of these provisions.
- The student loan interest deduction was permanently extended. The American Taxpayer Relief Act eliminated the rule that the deduction can be claimed only during the first 60 months of repayment. This provision is still active in 2014.
- Mortgage insurance premiums were deductible as part of the mortgage interest deduction through the end of 2013. The deduction expired and mortgage insurance premiums are no longer deductible in tax year 2014.
- The sales taxes deduction, in lieu of a deduction for state income taxes, was temporarily extended through the end of 2013. This deduction expired and has not been renewed for tax year 2014.
- The charitable deduction for contributing real property for qualified conservation purposes was temporarily extended through the end of 2013. This deduction expired and has not been renewed for tax year 2014.
- The above-the-line tuition and fees deduction was temporarily extended through the end of 2013. This deduction expired and has not been renewed for tax year 2014.
- The child tax credit remained unchanged and was permanently extended. The maximum amount of the child tax credit is $1,000, and the credit is partially refundable. However, the provision that reduces the earnings threshold for the refundable portion of the child tax credit to $3,000 will expire at the end of 2017.
- The dependent care tax credit remained unchanged and was permanently extended. Daycare expenses up to $3,000 for one child and $6,000 for two or more children qualify for the tax credit, and these amounts are not indexed for inflation.
- The adoption credit was permanently extended. The credit is indexed to inflation and worth up to $13,190 for tax year 2014.
- The American opportunity tax credit was extended temporarily through the end of 2017.