Tax Act Softens Leap Off the Fiscal Cliff
Some tax certainty returns with permanent rates, but those at the high end will get hit.
The American Taxpayer Relief Act of 2012 was enacted with great fanfare on Jan. 2, to avoid the “fiscal cliff.” The act makes permanent changes to individual income tax, estate and gift tax rules and temporarily extends several expiring provisions. Following are highlights of key tax provisions applicable to business owners and executives.
Individual Provisions
Income-Tax Rates: The act permanently extends existing rates. However, a 39.6 percent rate will apply beginning in 2013 to taxable income over $400,000 for single filers ($450,000 for married filing joint), thresholds now indexed for inflation.
Payroll Tax: The 2 percent temporary Social Security tax holiday expired on Dec. 31. A taxpayer earning the maximum Social Security wage base of $113,700 in 2013 will have a $2,274 tax increase.
Phase-out of Personal Exemptions and Itemized Deductions: Beginning in 2013, personal exemptions and certain itemized deductions will be phased out for taxpayers with adjusted gross incomes (AGI) above $250,000 for single filers ($300,000 for married filing jointly). These phase-outs applied prior to 2010 at lower AGI thresholds.
Permanent Alternative Minimum Tax Relief: Since 2001, Congress has annually increased the AMT exemption to exclude millions of taxpayers from AMT. The act permanent- ly increases the exemption after 2011 and indexes the exemption for inflation after 2012.
Capital Gains and Qualified Dividend Rates: The top tax rate on long-term capital gains and qualified dividends permanently increases to 20 percent in 2013 for single taxpayers with taxable income exceeding $400,000 ($450,000 for married filing joint). The existing 15 percent and 0 percent tax rate structure is made permanent for taxpayers below the income thresholds.
Estate Tax: The act permanently increases the top estate, gift and generation-skipping transfer (GST) tax rates from 35 percent to 40 percent after 2012. The estate, gift and GST tax exemption amounts are permanently set at $5 million and are indexed for inflation ($5.25 million in 2013). The surviving spouse’s portability election is made permanent after 2012 for the estate and gift tax exemption, but not the GST exemption.
Roth Conversions for Retirement Plans: The act expands the availability of Roth options to more employer-sponsored retirement plans and allows plan participants to convert any amount from a non-Roth to a Roth account in the same plan.
Other Significant Items Extended: Exclusion of 100 percent of gains from the sale of qualifying small business stock held for more than five years is extended for stock acquired before 2014. The charitable IRA rollover is revived for 2012 and 2013. Certain education, earned income and child tax credit provisions are also extended for five years.
Business Provisions
Tax Credits: The act extends the 20 percent research and exerimentations tax credit through 2013 and provides a 14 percent alternative simplified credit, and the Work Opportunity Tax Credit through 2013.
Accelerated Cost Recovery for Qualified Improvements: The 15-year cost recovery period is extended for certain leasehold, restaurant and retail improvements and new restaurant buildings placed in service before 2014.
Bonus Depreciation: The act extends 50 percent bonus depreciation for qualifying property placed in service before 2014 and also allows accelerated AMT credits in lieu of bonus depreciation.
Section 179 Expensing Limit: The $500,000 Section 179 expensing election is extended through 2013. Up to $250,000 of qualified leasehold improvements, qualified restaurant property and qualified retail improvements may be expensed within the overall limitation. The expensing limit reverts to $25,000 in 2014.
Other Significant Items Extended: The act extends special depreciation recovery periods for qualified Indian reservation property through 2013. The Indian Employment and New Markets tax credits are also extended through 2013.
Reduction in S Corporation Recognition Period for Built-In Gains Tax: The act extends the reduced five-year built-in-gains period for asset sales occurring in 2012 and 2013. In addition, the act clarifies built-in gains tax rules for carryovers and installment sales.
The Bottom Line
Expiration of the Bush-era tax rules would have resulted in dramatic tax increases for nearly every individual taxpayer. The act provides a softer landing and a framework for income, estate and gift tax planning, with no built-in expiration date. As tax season gets underway, taxpayers should consult with their advisers to determine the effect of the new tax rates, exemptions and phase-outs of tax benefits in 2012 and beyond.
T. Teal Dakan is a tax partner at BKD LLP
in Kansas City.
P | 816.701.0251
E | tdakan@bkd.com
Return to Ingram's January 2013