Selected Income & Estate Tax Provisions of the American Taxpayer Relief Act of 2012

Tax Update

Date: January 03, 2013

On January 1, 2013, Congress passed H.R. 8, the American Taxpayer Relief Act of 2012 (Act), which President Obama signed into law on January 3, 2013. The Act includes the following income, estate, gift and generation-skipping transfer (GST) tax provisions:

Income Tax Provisions

The Act extends a number of Bush-era income tax provisions and reinstates a number of Clinton-era income tax provisions with certain modifications. Significant items include:

  • Permanent extension of the 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent individual income tax rates.
  • Beginning in 2013, reinstatement of the 39.6 percent individual income tax rate for taxable income of more than $450,000 for married filing jointly filers (more than $225,000 for married filing single taxpayers), more than $425,000 for head of household filers or more than $400,000 for single filers.
  • Beginning in 2013, the rate for certain long-term capital gains and qualifying dividends for taxpayers in the new 39.6 percent income tax bracket is increased to 20 percent, not including the new 3.8 percent Medicare tax on net investment income. Furthermore, there is a permanent extension of the favorable current capital gain rates (e.g., 0 percent/15 percent) for certain long-term capital gains and qualifying dividends for all taxpayers except those whose taxable income puts them in the new 39.6 percent income tax bracket.
  • Beginning in 2013, reinstatement of the personal exemption phase-out (PEP) for taxpayers with adjusted gross income of more than $300,000 for married filing jointly filers (more than $150,000 for married filing single filers), more than $275,000 for head of household filers and more than $250,000 for single filers.
  • Beginning in 2013, reinstatement of the repeal of the phase-out of up to 80 percent of itemized deductions for taxpayers with adjusted gross income of more than $300,000 for married filing jointly filers (more than $150,000 for married filing single filers), more than $275,000 for head of household filers and more than $250,000 for single filers.
  • Permanent extension of the "marriage penalty" relief standard deduction, the 15 percent rate bracket for married filers and the earned income tax credit provisions.
  • Permanent extension of the $1,000 child tax credit and a five-year extension (through 2017) of the 2009 modification that provided that earnings above $3,000 would count toward refundability.
  • Permanent expansion of the student loan interest deduction and the dependent care credit.
  • Permanent extension of the adoption credit and the employer-provided child care tax credit.
  • Permanent patch of the alternative minimum tax (AMT) by (i) increasing the exemption amounts for 2012 to $50,600 for single filers and $78,750 for married filing jointly filers, (ii) indexing the exemption and phase-out amounts for inflation and (iii) allowing nonrefundable personal credits against the AMT.
  • Five-year extension of the "third-child" earned income tax credit rules included in the American Recovery and Reinvestment Act of 2009 (ARRA) (through 2017).
  • Two-year extension of the deduction for certain expenses of elementary and secondary school teachers (through 2013).
  • Two-year extension of the election to deduct state and local sales tax in lieu of state and local income taxes (through 2013).
  • Two-year extension of the special rule regarding contributions of capital gain real property by individuals for conservation purposes and the exclusion from gross income for distributions from an IRA that are "qualified charitable distributions" (through 2013).
  • Two-year extension of the qualified tuition deduction (through 2013).
  • Two-year extension of the deduction for mortgage insurance premiums (through 2013) and a one-year extension of the mortgage debt relief provisions (through 2013).
  • Two-year extension of the increase in the monthly exclusion for employer-provided van pool and transit pass benefits (through 2013).
  • Beginning in 2013, the employee Social Security tax rate will revert to 6.2 percent (from the stimulus level of 4.2 percent) for wages up to $113,700.
Business & Investment Incentives

The Act extends a number of business and investment incentives. Significant items include:

  • Two-year extension of the research tax credit (through 2013).
  • Two-year extension of the new markets tax credit program (through 2013). Unused new markets tax credits may be carried over until 2018.
  • Two-year extension of the empowerment zone tax incentives for certain economically depressed census tracts and the tax incentives for issuing New York Liberty Zone bonds (through 2013).
  • Two-year extension of the 15-year straight-line amortization for qualified leasehold improvements, qualified restaurant property and qualified retail improvements (through 2013), to apply to property placed in service on or before December 31, 2013.
  • One-year extension of 50 percent bonus depreciation for new qualified property placed in service before January 1, 2014 (and before January 1, 2015 for certain long-lived and transportation property), and a one-year extension to allow taxpayers to elect to accelerate some alternative minimum tax credits in lieu of bonus depreciation (through 2013).
  • Two-year extension of the 2011 Section 179 expense amount and phase-out limitations so that for tax years 2012 and 2013, the Section 179 expense amount is increased to $500,000, reduced on a dollar-for-dollar basis to the extent that the cost of qualifying property exceeds $2 million. For taxable years beginning in 2014 and later, the maximum expensing amount is $25,000 and the phase-out limitation is $200,000.
  • Two-year extension of temporary 100 percent capital gains exclusion for individuals who sell "qualified small business stock" (through 2013).
  • Two-year extension of the five-year holding period for S corporation built-in gains tax for sales of S corporation stock occurring in 2012 and 2013.
  • Two-year extension of the work opportunity tax credit (through 2013).
  • Two-year extension of the Section 956(c)(6) look-through rule for dividends, rental and royalties received by a controlled foreign corporation from a related controlled foreign corporation for two years (through 2013).
  • Two-year extension of Subpart F exemption for active-financing income (through 2013).
  • Two-year extension of the inclusion of a regulated investment company within the definition of a "qualified investment entity" for purposes of the FIRPTA rules (through 2013).
  • Two-year extension of enhanced charitable deductions for contributions of food inventories to designated institutions (through 2013).
  • Two-year extension of the exception to unrelated business taxable income regarding payments of rent, royalties, annuities or interest income by a controlled organization to its tax-exempt controlling parent pursuant to a binding written contract in effect on August 17, 2006 (through 2013).
  • Two-year extension of rules relating to "interest-related dividends" and "short-term capital gain dividends" received by regulated investment companies (through 2013).

The Act also extends certain energy-related provisions, including:

  • One-year extension of the renewable electricity property wind production tax credit to apply to a facility placed in service, or for which construction begins, before January 1, 2014. Further modifies Section 45 to allow renewable energy facilities for which construction begins by December 31, 2013 to qualify for the production tax credit. Extends taxpayer's right to elect the 30 percent investment tax credit in lieu of the production tax credit for renewable energy facilities for which construction begins by December 31, 2013.
  • Two-year extension of the $1 per gallon tax credit for biodiesel, the 10 cents per gallon small agri-biodiesel producer tax credit and the $1 per gallon tax credit for diesel fuel created from biomass (through 2013).
  • Two-year extension of the tax credit for certain energy-efficient improvements to residential homes (through 2013).
  • Two-year extension of the new energy-efficient home credit to qualifying homes purchased before January 1, 2014, and of the tax credit for energy efficient dishwashers, clothes washers and refrigerators (through 2013).
Estate, Gift & GST Provisions
  • The maximum rate for the estate, gift and generation-skipping transfer taxes is 40 percent. This represents an increase from the rate in 2012 (35 percent) but is less than the pre-2001 rate (55 percent).
  • The gift and estate tax exemption amounts remain unified with one another and are indexed for inflation from 2011. Although the Internal Revenue Service has not made an official announcement, it appears the unified exemption amount for lifetime gifts and decedents' estates in 2013 is $5.25 million.
  • The exemption amount for the generation-skipping transfer tax remains the same and is indexed for inflation from 2011 as well. Accordingly, despite no official announcement from the Internal Revenue Service, the exemption amount in 2013 for generation-skipping transfers appears to be $5.25 million also.
  • The unused unified exemption amount of a predeceased spouse may continue to be used by the surviving spouse for gift tax purposes and by the surviving spouse's personal representative for estate tax purposes, provided a proper portability election was made at the death of the predeceased spouse.

The Act did not, however, address previous proposals to limit the advantages of grantor trusts, make 10 years the minimum term of grantor retained annuity trusts and narrow the availability of valuation discounts. Although there has been no meaningful discussion about if or when these proposals will be considered by Congress, they should be borne in mind as a possibility and may be reason to consider estate planning in 2013. Nonetheless, the Act, with its certainty, provides a welcome change from the last few years.

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