On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (2012 Tax Act), confirming the expectation that individual U.S. federal income tax rates for high-income taxpayers would rise in 2013. Considerable uncertainty continues to exist regarding whether the taxation of carried interest will change.
The 2012 Tax Act resulted from well-publicized negotiations regarding the tax aspects of the "fiscal cliff," a term used to describe the expiration of certain tax rates and tax incentives, along with the introduction of certain spending cuts.
The 2012 Tax Act covers a broad range of tax law provisions affecting both individuals and business entities. Following are some highlights of the new law:
- Tax brackets for individuals with annual income less than $400,000 have been made permanent, while the rate for those with income above that level is increased permanently to 39.6%.
- The capital gains tax rate is permanently increased from 15% to 20% for those individuals with annual income above $400,000. In addition, the provision including qualified dividend income in the calculation of capital gains has been made permanent.
- For individuals with annual income above $250,000, a phase-out mechanism on personal exemptions and a limitation on itemized deductions are reinstated, after having been suspended in 2011 and 2012.
- The 100% exclusion from gain of proceeds from the sale of "qualified small business stock" (as defined in the Internal Revenue of Code) applicable to stock acquired after September 27, 2010 is extended for stock acquired before January 1, 2014, at which point, absent further action, the exclusion will return to 50%.
- Look-through treatment of payments between related controlled foreign corporations (CFCs) under the foreign personal holding company rules has been extended through 2012 and 2013. This allows for deferral for certain payments between commonly controlled CFCs.
The 2012 Tax Act also includes a variety of energy tax extenders, as well as an extension of the availability of a tax credit for certain research expenses.