The American Taxpayer Relief Act of 2012 (the “Act”) signed into law by President Obama on January 2, 2013, modifies and/or extends certain “Bush-era” tax cuts or tax credits that would have expired at the end of 2012. The following provides a brief summary of certain provisions of the Act and other federal taxes that go into effect this year that may be of particular interest.
Increase In Top Marginal Tax Rate On Individuals: Under the Act, the top marginal income tax rate for individuals is increased from 35% to 39.6% on taxable income in excess of $450,000 for married couples filing joint income tax returns and surviving spouses, or $425,000 for individuals filing as “heads of households,” or $400,000 for individual “single” taxpayers, or $225,000 for married individuals filing separately. All other income tax brackets remain the same as in 2012.
- A hallmark of the Bush-era tax cuts was the lowering of the marginal income tax rates at which individual taxpayers, regardless of the level of their income, were taxed, with the maximum marginal income tax rate for individuals under Bush-era tax cuts being 35%. Expiration of the Bush-era tax cuts would have increased the marginal income tax rates for all taxpayers beginning this year.
Increased Tax Rate On Capital Gains/Qualified Dividends: Beginning in 2013, individual taxpayers with total taxable income in excess of the thresholds described above will be subject to a 20% tax rate on their long-term capital gains (excluding capital gains from collectibles and certain depreciable real property) and qualified dividends. All other taxpayers will continue to be taxed on their long-term capital gains (excluding capital gains from collectibles and certain depreciable real property) and qualified dividends at a maximum tax rate of 15%.
- Under the Bush-era tax cuts, the long-term capital gains and qualified dividends of individuals were subject to a maximum rate of tax equal to 15% (excluding capital gains from the sale or exchange of collectibles and certain depreciable real property, which are subject to higher tax rates). Expiration of the Bush-era tax cuts would have resulted in the taxes on long-term capital gains and qualified dividends of all taxpayers, including those not subject to taxes under the Bush-era tax cuts, increasing, in the case of capital gains, from 0% to a maximum of 15% for taxpayers not subject to tax on their capital gains under the Bush-era tax cuts and to 20% for taxpayers subject to a 15% capital gains tax under the Bush-era tax cuts; and, in the case of qualified dividends, from a maximum of 15% to a maximum of 39.6%.
New Medicare Surtax-Addition to Income Taxes: The Act did not make any changes to the new Medicare surtax applicable to individuals, trusts and estates effective beginning in 2013 that was imposed by the Patient Protection and Affordable Care Act and companion income tax legislation. Commencing in 2013, individuals, trusts or estates that have total adjusted gross income (taxable income before reduction for standard or itemized deductions and deductions for personal exemptions) in excess of the below specified thresholds will have to pay a Medicare surtax of 3.8% on their “net investment income.” This surtax is in addition to normal income taxes payable by these taxpayers on net investment income. The Medicare surtax thresholds are $200,000 for single taxpayers, $250,000 for married taxpayers filing joint income tax returns and surviving spouses, and $125,000 for married individuals filing separately. Substantially lower thresholds apply to trusts and estates.
- “Net investment income” subject to the Medicare surtax includes interest and dividend income (including qualified dividends), income from passive activities and capital gains-other than capital gains from the sale of property used in a trade or business in which the individual taxpayer materially participates, or from the sale of stock or equity interest in “pass-through” entities that operate such trades or businesses.
Estate and Gift Tax: Under the Act, commencing in 2013, the maximum estate and gift tax rates are set at 40% with an estate and lifetime gift tax exemption amount of $5,000,000 (which is cumulative). The generation-skipping transfer (“GST”) exemption amount has also been preserved at $5,000,000. The exemption amounts are adjusted for inflation for tax years after 2011, and the adjusted amount for 2013 is $5,250,000.
- The expiration of the Bush-era tax cuts would have caused the maximum tax rate on taxable estates and taxable gifts to be increased, for individuals dying or gifts made after 2012, from 35% to 55%, and a lowering of the gift, estate and GST exemptions to $1,000,000 (which would have been the exemption amounts under the law prior to the Economic Growth and Tax Relief Reconciliation Act of 2001).