What is the impact of the American Taxpayer Relief Act of 2012 on Individual Taxpayers?
As most of us are aware that on January 1st, “the Senate and House of Representatives avoided this Fiscal Cliff with the passage of the American Taxpayer Relief Act of 2012 (Act)”. Due to this legislation, most taxpayers will not see an increase in their income tax rates.
However, all W-2 wage earners will see a decrease in take home pay as the result of the scheduled expiration of the 2% Social Security tax discount which was in effect for 2011 and 2012. The following represents a summary of the new legislation that would be impacting individual taxpayers.
1. Individual Income Tax Rates.
The Act keeps tax rates for 2013 and beyond at the same rates as they were for 2012 but with one exception, that is, a new 39.6% tax bracket has been added for higher income taxpayers. This new tax bracket applies only to taxable income in excess of the following income thresholds;
a)$450,000 for married filing joint and qualifying widow(er) filers.
b)$400,000 for single filers.
c)$425,000 for those filing as head of household.
d)$225,000 for married filing separate returns.
2. Tax Rates on Capital Gains and Qualified Dividends.
a)The Capital Gains tax rate will remain at 15% (zero for taxpayers in the 10 or 15% tax brackets) for all taxpayers with taxable income below the new 39.6% tax bracket.
b)The Capital Gains tax rate has been increased to 20% for those taxpayers subject to the 39.6% tax rate.
c)Additionally, the new 3.8% Medicare tax on investment income (taxpayers with AGI of greater than $250,000 if married filing joint, $200,000 if filing single or head of household, or $125,000 if married filing separately) for years beginning after 2012 remains in effect bringing the total tax rate on long-term capital gains and qualifying dividends to 23.8% for high income taxpayers.
3. Alternative Minimum Tax Relief. (AMT)
The increased AMT exemption which had expired for tax years after 2011 has been reinstated permanently beginning with the 2012 tax year. The AMT exemptions are as follows;
a)$50,600 for single or head of household taxpayers.
b)$78,750 for married filing joint taxpayers.
c)$39,375 for married filing separate taxpayers will be indexed for inflation each year beginning in 2013.
4. Phaseout of Itemized Deductions and Personal Exemptions.
The overall itemized deduction phase-out has been reinstated for tax years beginning after 2012 for taxpayers with the following adjusted gross income is as follows;
a)Greater than $300,000 for married filing joint taxpayers.
b)Greater than $250,000 for single taxpayers.
c)Greater than $275,000 for head of household filers.
The phase-out is 3% of the amount the taxpayer's adjusted gross income exceeds the threshold amount. The phase out is capped at 80% of the taxpayer's allowable itemized deductions.
The act also “reinstates the phase-out of personal exemptions for years beginning after 2012”.
Personal exemptions are reduced by two percent for each $2,500 (or fraction thereof) by which adjusted gross income exceeds the threshold.
5. Education Related Benefits.
The American Opportunity tax credit for qualified tuition and related expenses has been extended through 2017. This credit allows for an up to $2,500 tax credit for qualifying taxpayers.
The Act also extends the qualified tuition and related expense deduction for 2012 and 2013. However, “both of these tax benefits are phased out for higher income taxpayers.”