The New Tax Act

The New Tax Act

The Senate and House have passed a new federal tax law known as the American Taxpayer Relief Act of 2012 (“New Tax Act”).

But now with the swearing in of new Congress members, it is likely that they will be tackling the federal deficit during 2013. In light of this there will certainly be additional tax law changes in the new year.

Some of the more important provisions of this New Tax Act are listed below.

1. Income Tax Rates

The New Tax Act sustains the reduced 2001 income tax rates for individuals earning up to $400,000 per year for single filers ($450,000 for married couples filing joint returns and surviving spouses). But anything income above this will be subject to a 39.6 % tax rate. Also as of January 1, 2013, a 3.8% healthcare tax will be applied to both wages and investment income, including capital gains, for those that are in a the higher tax bracket. And those under the tax increase rates, you will still see a 2% payroll tax increase.

2. Capital Gains and Qualified Dividend Rates

Those taxpayers who fall under the $400,000/$450,000 income bracket will continue to have long-term capital gains and qualified dividend income taxed at the lower 15 % tax rate. But long-term capital gains and qualified dividends will be subject to an increase of 20 % for those who exceed the $400/$450,000 mark. This percentage rate is still effectively good for high income earners because it still works out to be less than the 39.6% highest ordinary income tax rate. For those taxpayers who fall into a tax bracket that requires less than 25%, their capital gains and dividends tax will be a 0% tax rate.

3. Alternative Minimum Tax

For tax years beginning after 2011, the alternative minimum tax is a permanent fix rate. It increases the Alternative Minimum Tax Exemption amount to $50,600 for single taxpayers and $78,750 for joint filing with a spouse. These exemption amounts increase after 2012 with the rate adjusting to accommodate for inflation.

4. Phase out of Personal and Itemized Deductions

Also beginning in 2013, for those with incomes greater than $250,000, personal exemption phase outs and the “Pease” limitation on itemized deductions will apply and for married couples filing jointly who have incomes more than $300,000. Itemized deductions are phased out under the “Pease” limitation, by reducing taxpayers’ itemized deduction by 3% of the amount by which the taxpayers’ adjusted gross income is greater than these income bracket amounts (with the reduction not to exceed 80% of allowable itemized deductions).

5. Bonus Depreciation for 2013

A 50% bonus depreciation for taxpayers investing in certain capital improvements will apply in 2013.

6. Leasehold Improvements

Now extended to January 1, 2014, are the 15-year straight line amortization for qualified leasehold improvements, qualified restaurant buildings, and qualified retail improvements.

7. Extension of Other Tax Provisions

The research and development tax credit and deduction for state and local taxes will apply through 2013.

8. Estate and Gift Tax Law Changes

The Estate and Gift Tax Exemption and the Generation-Skipping Tax Exemption stay fixed at $5,120,000 per person (or $10,240,000 for two spouses). These exemption amounts will increase comparatively to compensate for inflation. The unified estate and gift tax rate (and the Generation-Skipping Tax rate) increases to 40%, up from 35%. The New Tax Act also provides for the spousal portability provision which allows spouses to transfer their unused estate tax exemption to their surviving spouse. Noteworthy, the New Tax Act does not include any of the threatened tax provisions to limit the use of GRATs, restrict sales to grantor trusts, commonly called ”defective income trusts,” or to restrict valuation discounts. These essential estate planning procedures can continue as per standard industry practice.

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401(K) 2012