The recently enacted 2012 American Taxpayer Relief Act is a sweeping tax package that Congress passed into law under the pressure of a "Fiscal Cliff." Here's a look at some of the key elements of the package:
Tax rates
For tax years beginning after 2012, the tax brackets from the Bush tax cuts will remain in place and are made permanent. This means that, for most taxpayers, the tax rates will stay the same. However, there will be a new 39.6% rate, which will begin at the following thresholds: $400,000 (single), $425,000 (head of household), $450,000 (joint filers), and $225,000 (married filing separately). These dollar amounts will be inflation-adjusted for tax years after 2013.
Estate tax
The new law prevents steep increases in estate, gift and generation-skipping transfer (GST) tax that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation). However, the new law also permanently increases the top estate, gift, and GST rate from 35% to 40% It also continues the portability feature that allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse. All changes are effective fore individuals dying and gifts made after 2012.
Capital gains and qualified dividends rates
The new law retains the 0% tax rate on long-term capital gains and qualified dividends, modifies the 15% rate, and establishes a new 20% rate. It should be noted that the 20% top rate does not include the new 3.8% Medicare surtax on investment-type income and gains for tax years beginning after 2012, which applies on investment income above $200,000 (single) and $250,000 (joint filers) in adjusted gross income. So actually, the top rate for capital gains and dividends beginning in 2013 will be 23.8% if income falls in the 39.6% tax bracket. For lower income levels, the tax will be 0%, 15%, or 18.8%.
Itemized deduction limitation
Beginning in 2013, itemized deductions will be limited for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers).
AMT relief
The new law provides permanent alternative minimum tax (AMT) relief. In addition, for tax years beginning after 2012, it indexes these exemption amounts for inflation.
Depreciation
The new law extends increased expensing limitations and treatment of certain real property as Code Section 179 property. It also extends and modifies the bonus depreciation provisions with respect to property placed in service after Dec. 31, 2012, in tax years ending after that date.
Payroll tax cut is no more
The 2% payroll tax cut was allowed to expire at the end of 2012.
Individuals and business owners should consult with their tax professionals to check what the impact of the new tax law will be.
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