Thursday, January 3, 2013


Here is a listing of the major provisions of the American Taxpayer Relief Act of 2012 (passed in 2013) that affect Form 1040 (and 1040A) filers, based on my readings -

(1)  All the expiring “Bush” tax cuts (from the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003) are made permanent, with the addition of a new top tax rate for regular income tax and capital gains and qualified dividends.

The individual marginal tax rates will remain 10%, 15%, 25%, 28%, 33%, and 35%, with a new top rate of 39.6% on taxable income over $400,000 for Single, $425,000 for Head-of-Household filers, $450,000 for Married Filing Joint, and $225,000 Married Filing Separate.

The special tax rates for capital gains and qualified dividends remains at 15% for those in the 25% - 35% tax brackets and 0% for those in the 10% and 15% brackets.  A 20% rate will apply to those in the new 39.6% bracket.  

(2)  The exemption amount for the dreaded Alternative Minimum Tax (AMT) is permanently indexed for inflation, retroactive to January 1, 2012, as is relief from the dreaded AMT for nonrefundable credits. For 2012 the exemption amounts are $50,600 for single filers, $78,750 for married taxpayers filing joint returns, and $39,375 for separate filers.

(3)  The American Opportunity Credit for qualified tuition and other post-secondary education expenses and the recently enhanced provisions of the Child Tax Credit and the Earned Income Credit are extended through 2017.  The basic “Bush-era” increases to the Child Tax Credit (from $500 to $1,000 per qualifying child) and the Earned Income Credit are made permanent.  

(4)  The PEP and Pease reductions of personal exemptions and itemized deductions based on “excessive” Adjusted Gross Income (AGI) are reinstated.  The amounts of AGI at which the reductions kick in are $250,000 for Single, $275,000 for Head of Household, $300,000 for Married Filing Joint, and $150,000 for Married Filing Separate.

Itemized deductions are reduced by 3% of the amount a taxpayer’s AGI exceeds the appropriate amount.  The reduction cannot exceed 80% of itemized deductions, with some adjustments.   

Personal exemptions are reduced by 2% for each $2,500 ($1,250 if Married Filing Separate), or portion thereof, that a taxpayer’s AGI exceeds the appropriate amounts.

(5)  The following “temporary” tax benefits are extended for 2012 and 2013 -

·      The above-the-line deduction for certain expenses of elementary and secondary educators;

·      The above-the-line deduction for qualified tuition and related expenses;

·      The itemized deduction as interest for mortgage insurance premiums;

·      The option to elect to claim as an itemized deduction state and local general sales taxes instead of state and local income taxes;

·      The exclusion from gross income of discharge of qualified principal residence indebtedness; and

·      The ability to make a direct tax-free transfer of IRA distributions to a charity and use this as one’s Required Minimum Distribution (RMD).  

Taxpayers can choose to treat distributions made from an IRA to a charity in January of 2013 as being made in December of 2012, and to treat an IRA distribution received in December of 2012 as a tax-free transfer to a charity if the money is transferred to a charity before February 1 of 2013.

(6)  The increased Section 179 expensing amounts and the additional 50% first-year bonus depreciation are extended through 2013.  For 2012 and 2013 the maximum Section 179 deduction is $500,000, with a “qualifying property threshold” of $2 Million.  

And under the Act the federal Estate Tax and Gift Tax lifetime exclusion of $5 million indexed for inflation ($5.12 million in 2012) is made permanent, with the top tax rate increasing from 35% to 40% effective Jan. 1, 2013. The option of the Estate Tax “portability” election (under which the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount) is also permanent. 

This legislation also extends for one-year unemployment benefits that were due to expire Jan. 1st, and delays until March 1 the across-the-board budget cuts known as “sequestration” that were supposed to take effect on January 2nd.

What is noticeably missing is an extension of the 2% reduction of the employee’s share of Social Security Tax withholding, and the corresponding reduction in the Self-Employment Tax, which expired on December 31, 2012.  This was the latest incarnation of Dubya’s disastrous tax rebate checks.  It appears that no new “gimmick” will replace the 2% reduction. 

Beginning with pay checks issued after December 31, 2012, the employee’s share of Social Security Tax withholding will return to 6.2% of wages (up to the maximum wage base), equal to the employer’s share, and the Self-Employment Tax will return to 15.3% for the same combined maximum W-2 and net self-employment earnings base .  So everyone will get a 2% cut in pay beginning January 1, 2013.

I wish that the idiots in Congress would have either “fished or cut bait” regarding the “extenders”.  Some should have disappeared and other made permanent (as long as they were making just about everything else permanent). 

The deduction for educator expenses has always confused me.  It is of no real consequence - the tax savings is $60-$70 for most educators.  Depending on where you live, this barely covers the cost of a dinner out.  And why were educators singled out.  Are they more valuable than policemen, firemen, nurses, EMTs, or even school cafeteria workers, all of whom have “out of pocket” employee expenses?

And God only knows why the deduction for mortgage insurance premiums was ever created.  It is basically life insurance.  I expect some Congressarseholes owed the mortgage insurance lobby a favor.  It certainly should not have been extended.

As mentioned in an earlier post, there is absolutely no “tax reform” in the Act.
CCH has published a good "Tax Briefing" on the Act.  Click here to download the briefing.


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