The following are what I like to think are the highlights in the American Taxpayer Relief Act of 2012. In no way are the all-inclusive, they are just the items that I think will be most useful for my clients.
In the months leading up to the fiscal cliff if you asked me what I thought I would tell you that I was most worried about the AMT patch. AMT was originally intended as an alternative way to calculate tax for the wealthy but a provision for it to be indexed for inflation every year was not written into it. Fast forward to current times and it means that this alternative way to calculate tax was going to hit everybody gainfully employed. So I am very relieved that they not only approved a patch but went ahead and made it permanent and added some wording so it will be indexed every year. And for that I give them a gold star.
Remember two years ago when there was all that talk of the Bush tax credits expiring and they extended them? Well they were set to expire in 2012 and instead of extending them they made them permanent and then tweaked them. For instance tax rates will remain at 10%, 15%, 25%, 28%, 33%, 35% and they added a new one of 39.6% for those earning over $400,000 if single or $450,000 if married filing jointly.
They tweaked capital gains tax for taxpayers exceeding $400,000 if single or $450,000 if married filing jointly to 20%.
They brought back phase-out’s on exemptions and deductions. For joint filers in excess of $300,000 the personal exemption will begin to phase out as will the itemized deductions.
They kept the estate tax exemption at five million but increased the tax rate from 35% to 40% for those exceeding the five million.
They extended some popular deductions like the expenses for teachers, the exclusion for those giving up their homes to foreclosure to exclude the debt forgiveness as income, the treatment of mortgage insurance premiums as qualified residence interest, the option to deduct state and local sales tax, and the tuition deduction.
For businesses they extended the 50% bonus depreciation rules and they increased the amount to deduct under Section 179 to $500,000 (increasing from $25,000) however for 2014 it will revert back to $25,000 and there will be no bonus depreciation. So here is an early 2013 tax tip…..buy new assets now! They also increased the depreciation cap for automobiles and trucks by $8,000.
They also extended some credits for businesses like the one for research and development and the work opportunity credit for hiring members of certain targeted groups such as veterans or long term family assistance recipient.
I hope these highlights help you cut through all the long winded discussions on what was passed.