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American Taxpayer Relief Act

In response to the fiscal cliff crisis, Congress passed H.R. 8, the “American Taxpayer Relief Act,” on January 2, 2013.  This Act contains important provisions for business and individual taxpayers, including a permanent extension of the Bush era income tax reductions for lower and middle income taxpayers and an increase in tax rates for higher income taxpayers.  In addition, the Act temporarily extends key tax credits and depreciation incentives.  With proactive tax and financial planning, taxpayers can be prepared for 2013 and beyond.  The following is a summary of the most important aspects of the bill:

Individual Tax Rates – The reduced Bush era tax rates have been permanently extended for single taxpayers with income less than $400,000 and married taxpayers filing jointly with income less than $450,000.   Taxpayers with taxable income above these thresholds will be in the 39.6% tax bracket.  In 2012, the highest tax bracket for all individual taxpayers was 35%.

Capital Gains and Dividend Rates – Starting in 2013, taxes on capital gains and qualified dividends are permanently increased from 15% to 20% for single taxpayers with income over $400,000 and married taxpayers filing jointly with income over $450,000.

Estate, Gift and Generation-Skipping Transfer (GST)Taxes – The Act permanently increases the top estate, gift and GST tax rate from 35% in 2012 to 40% beginning in 2013.  The lifetime exclusion amount remains at $5 million (indexed for inflation) and allows for portability.

Itemized Deductions and Personal Exemptions – Starting in 2013, itemized deductions and personal exemptions will be limited for single taxpayers with income over $250,000 and married taxpayers filing jointly with income over $300,000.  This limitation on personal exemptions and itemized deductions was suspended for 2011 and 2012.

Alternative Minimum Tax (AMT) Exemptions – The alternative minimum tax is now adjusted for inflation and will no longer need to be “patched” each year.

Payroll Tax Holiday – The 2% reduction in employees’ share of Social Security taxes was not extended, increasing the tax to 6.2%.  The employers’ share of Social Security taxes remains at 6.2%.

Bonus Depreciation and Section 179 Expensing – Congress extended 50% bonus depreciation on new asset additions (including leasehold improvements) placed in service in 2013.  Section 179 expense on new and used asset purchases increases to $500,000 and will be phased out after $2,500,000 of asset purchases.  The increase in Section 179 expense applies only to tax years beginning in 2012 and 2013.

Business Tax Credits – The research and development credit and the energy efficient credit for multifamily and residential developers are extended through the end of 2013.

While this is a summary of the most widely applicable tax changes, there are numerous other tax provisions contained within this bill.  For additional specificity, please see coverage of the Act in the CCH Tax Briefing: American Taxpayer Relief Act of 2012. Please also contact your Berntson Porter tax advisor at 425-454-7990 to discuss how these changes may affect you.


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