Summary of the American Taxpayer Relief Act

The following information was fresh just this morning (January 2, 2013), I have highlighted the specific provisions that I believe will affect a significant number of my clients.

If you have any questions about how these items may affect you specifically, please don’t hesitate to call. ―CH

Individual tax rates:

  • The marginal rates under the Bush era tax cuts are retained other than a new top rate of 39.6% for filers with taxable income over $400,000 for single, $425,000 for head of household, $450,000 for married filing jointly, and $225,000 for each married spouse filing separately.

Phaseout of itemized deductions and personal exemptions:

  • The personal exemptions and itemized deduction 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:

  • A 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:

  • The exemption amount for the AMT on individuals is permanently indexed for inflation.

Estate and gift tax:

  • The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top rate increases from 35% to 40% effective January 1, 2013.
  • The estate tax portability election (allowing a spouse to take the decedent’s remaining estate exclusion was made permanent.

Other Permanent extensions:

  • Marriage penalty relief;
  • Liberalized child and dependent care credit rules;
  • The exclusion for employer-provided educational assistance;
  • The enhanced rules for student loan deductions;
  • The higher contribution amount and other changes to Coverdell education savings accounts;
  • The employer-provided child care credit;
  • The exclusion for National Health Services Corps and Armed Forces Health Professions Scholarships;
  • Special treatment of tax-exempt bonds for education facilities;
  • Repeal of the collapsible corporation rules;
  • Special rates for accumulated earnings and personal holding company taxes; and
  • Modified tax treatment for electing Alaska Native Settlement Trusts.

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 2018;
  • Enhanced provisions of the child tax credit extended through 2018;
  • Enhanced provisions of the earned income tax credit extended through 2018; and
  • Permanent extension of a rule excluding from taxable income refunds from certain federal and federally assisted programs.

Individual provisions expired at the end of 2011 extended through 2013:

  • Deduction for certain expenses of elementary and secondary school teachers;
  • Exclusion from gross income of discharge of qualified principal residence indebtedness;
  • Parity for exclusion from income for employer-provided mass transit and parking benefits;
  • 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; and
  • Tax-free distributions from individual retirement plans for charitable purposes.

Energy tax extenders (extended through 2013):

  • Credit for energy-efficient existing homes;
  • Credit for alternative fuel vehicle refueling property;
  • Credit for two- or three-wheeled plug-in electric vehicles;
  • Cellulosic biofuel producer credit;
  • Incentives for biodiesel and renewable diesel;
  • Production credit for Indian coal facilities placed in service before 2009;
  • Credits with respect to facilities for producing energy from certain renewable resources;
  • Credit for energy-efficient new homes;
  • Credit for energy-efficient appliances;
  • Special allowance for cellulosic biofuel plant property;
  • Special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy for qualified electric utilities; and
  • Alternative fuels excise tax credits.

Business tax modifications and extensions (through 2013):

  • The credit for increasing research and development activities;
  • Temporary minimum low-income tax credit rate for non-federally subsidized new buildings;
  • Housing allowance exclusion for determining area median gross income for qualified residential rental project exempt facility bonds;
  • Indian employment tax credit;
  • New markets tax credit;
  • Railroad track maintenance credit;
  • Mine rescue team training credit;
  • Employer wage credit for employees who are active duty members of the uniformed services;
  • Work opportunity tax credit;
  • Qualified zone academy bonds;
  • Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements; and qualified retail improvements;
  • Accelerated depreciation for business property on an Indian reservation;
  • Enhanced charitable deduction for contributions of food inventory;
  • Election to expense mine safety equipment;
  • Special expensing rules for certain film and television productions;
  • Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico;
  • Modification of tax treatment of certain payments to controlling exempt organizations;
  • Treatment of certain dividends of regulated investment companies;
  • Regulated investment company qualified investment entity treatment under the Foreign Investment in Real Property Act;
  • Extension of subpart F exception for active financing income;
  • Lookthrough treatment of payments between related controlled foreign corporations under foreign personal holding company rules;
  • 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;
  • Empowerment Zone tax incentives;
  • Tax-exempt financing for Ney York Liberty Zone;
  • Temporary increase in limit on cover-over of rum excise taxes to Puerto Rico and the Virgin Islands; and
  • American Samoa economic development credit.

Foreign provisions:

  • The IRS’s authority to apply withholding tax to gains on the dispositions of US real property interests by partnerships, trusts, or estates that are passed through to partners or beneficiaries that are foreign persons is made permanent.
  • The withholding rate is increased to 20%.
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