Summary of the American Taxpayer Relief Act HR8
Ordinary Income Tax Brackets
The Act increases the top tax bracket to 39.6% for taxable income in excess of the following thresholds:
- $400,000 for individuals
- $425,000 for heads of households
- $450,000 for married filing jointly
The tax brackets below these thresholdamounts are permanently set at their current levels. Further, the tax brackets will be indexed for inflation.
Long-term Capital Gains Rates
The Act makes permanent the 0% and the 15% long-term capital gains tax rates for those tax payers in the lowertax brackets. It also increases the long term capital gains tax rate to 20% for those taxpayers that are in the new top tax bracket of 39.6% ($400,000 for individuals or $450,000 for married filing jointly). However, the new Medicare tax from the 2010 Affordable Care Act on net investment income will still apply for those with modified adjusted gross income above $200,000 for individuals and $250,000 for married filing jointly. Consequently the overall rate for taxpayers in the new highest bracket willbe 23.8%.
Qualified Dividend Rates
The Act also eliminated the provision that caused the qualified dividend rate to expire. Consequently, taxpayers with income below the income threshold of $400,000 for individuals and $450,000 for married filing jointly will continue to receive the preferential 15% taxation on qualified dividends (0% for those taxpayers whose ordinary income is generally taxed at a rate below 25%). Those taxpayers above the threshold amounts will now have a top tax rate of 20% on qualified dividends. Further, the new Medicare tax from the 2010 Affordable Care Act on net investment income will apply for those with modified adjusted gross income above $200,000 for individuals and $250,000 for married filing jointly. Consequently the overall rate for taxpayers in the new highest bracket will be 23.8%.
Payroll Tax Rate
The 2% cut to the 6.2% employee’s Social Security portion of the Federal Insurance Contributions Act (FICA) expired at the end of 2012. The Act did not extend this provision. Therefore, an individual who earns wages of at least $110,000 will have an additional tax of approximately $2,200 in 2013.
Alternative Minimum Tax
The Act also permanently addresses the Alternative Minimum Tax (AMT) exemption for 2013 and beyond, as well as retroactively for 2012. The new AMT exemption for 2012 is $50,600 for individuals and $78,750 for married filing jointly. For 2013 and beyond, it is indexed to inflation.
Estate and Gift Tax Rate
The Act permanently extends the 2012 Gift, Estate and Generation- Skipping Transfer Tax with an annually inflation adjusted $5 million exclusion for decedents dying after December 31, 2012. The top estate tax rate permanently increases to 40% from the top rate of 35% in 2012. Further, the portability feature that allows the estate of the first spouse to die to transfer his or her unused estate tax exemption amount to the surviving spouse is also made permanent.
Phaseout of Itemized Deductions
The phaseout for itemized deductions that had been previously suspended is reinstated for taxpayers with AGI of more than $300,000 if married filing jointly and $250,000 for individuals. Under the phaseout, the total amount of itemized deductions that can be claimed will be reduced by 2% for each $2,500 (or portion thereof) to the extent the taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold. The dollar amounts are adjusted for inflation for tax years after 2013.
Phaseout of Personal Exempt ions
The personal exemptions phaseout (PEP) is also reinstated for taxpayers making more than $300,000 if married filing jointly and $250,000 for individuals. In the past the PEP had a different threshold phaseout than that for itemized deductions, but now the two are the same. Consequently, under the phaseout, the total amount of exemptions that can be claimed will be reduced by 2% for each $2,500 (or portion thereof) to the extent the taxpayer’s AGI exceeds the applicable threshold. The dollar amounts are adjusted for inflation for tax years after 2013.
Qualified Charitabl eDistributions from an IRA to Charity
The Act extends the Qualified Charitable Distributions (QCD) provision through December 31, 2013. The QCD provision allows a taxpayer to donate up to $100,000 of IRA proceeds directly to a charity, in what is referred to as an above the line deduction. This provision allows the required minimum distribution (RMD) for individuals 70½ or older to qualify as a QRD, and the gift is counted as all or part of the mandatory annual IRA payout. Although the individual is not allowed an itemized charitable deduction, the QCD does not count as taxable income. This is retroactive to 2012, and a special rule allows qualified charitable distributions made by February 1, 2013, to be counted retroactively for the 2012 tax year.
Traditional 401(k) toRoth 401(k) Conversion Opportunity
The Act allows individuals to convert their existing 401(k) plan to a Roth 401(k) plan — if the plan offers designated Roth accounts — without having to meet one of the plan distribution eligibility requirements (i.e. separation from service, attaining age 59½, disability or death of plan participant). The provision allows such intra-plan Roth conversions for 401(k) plans much in the same manner the tax code permits conversions from traditional IRAs toRoth IRAs, which requires the individuals to pay tax on the value of the conversion. Given the way the rule is written, at this time it is not certain whether the 401(k) to Roth 401(k) conversion could later be “recharacterized” as a Roth IRA back to a traditional IRA, although a “technical correction” could be added later to address this technical detail.
