Income Tax Rates
The legislation retains the current ordinary income tax rates, and adds a new tax rate of 39.6% for taxable income over $400,000 (single) and $450,000 (married filing jointly).
The 2% reduction in Social Security payroll tax rates expires. Withholding amounts will be adjusted accordingly, generally resulting in less take-home pay.
The new law preserves the favorable tax treatment for qualified dividends at these rates:
For taxpayers with modified adjusted gross income above $200,000 (single) or $250,000 (joint filers), a new 3.8% tax will apply to net investment income. For taxpayers with compensation or self-employment income above $200,000 (single) or $250,000 (joint filers), an additional 0.9% tax will apply to compensation or self-employment income above these thresholds.
Itemized deductions and Personal Exemption Phase Out
Taxpayers with adjusted gross income (AGI) above a $250,000 (single) and $300,000 (married filing jointly) threshold will lose a portion of their itemized deductions. The “haircut” will equal 3% of the amount by which income exceeds these thresholds but the reduction cannot exceed 20% of itemized deductions. Medical deductions, casualty losses, and gambling deductions are exempted.
Taxpayers with AGI above a $250,000 (single) or $300,000 (married filing jointly) threshold will lose a portion of their personal exemptions. Available personal exemptions will be reduced 2% for each $2,500 (or portion thereof) of income above the threshold.
Alternative Minimum Tax
The alternative minimum tax (AMT) income levels were raised to $50,600 (single) and $78,750 (married filing jointly) for 2012 and indexed for inflation, thus removing the year-by-year uncertainty.
Education Tax Incentives
Education savings accounts (Coverdale) contribution amounts will remain at $2,000, the contribution deadline remains April 15 following the applicable contribution year, and qualified expenses continue to include those related to enrollment in elementary and secondary education.
The American Opportunity Tax Credit is preserved through December 31, 2017. It permits eligible taxpayers to claim a credit equal to 100% of the first $2,000 of qualified tuition and related expenses, and 25% of the next $2,000 of qualified tuition and related expenses (for a maximum tax credit of $2,500 for the first four years of post-secondary education).
The tuition and fees deduction of up to $4,000 is retained through 2013.
Qualified charitable distributions (QCDs) from IRAs
Tax-free distributions from individual retirement plans for charitable purposes, which expired 12/31/2011 is revived for 2012 and continued through 2013. IRA owners over 70 ½ may make a distribution before February 1, 2013 and treat it as though it were made on December 31, 2012. Additionally, for IRA distributions made after November 30, 2012 and before January 1, 2013, taxpayers may transfer the distributed funds in cash to charity during January 2013 and retroactively elect to treat the distribution as a QCD.
Medical expense deduction: to be deductible, the amount of the medical expenses must first exceed a 10% of AGI floor (compared to a 7.5% threshold in 2012). An exemption exists for those who are 65 or older (in the case of a married couple, only one spouse must qualify).
Mortgage insurance premiums may qualify as qualified residence interest, (expired 12/31/2011) and is now revived for 2012 and continued through 2013;
The option remains to deduct state and local general sales taxes, (expired 12/31/2011) now continued through 2013.
Child tax credit remains at $1,000.
The nonbusiness energy property credit for energy-efficient existing homes is extended through 2013. A taxpayer can claim a 10% credit on the cost of:
1. Qualified energy efficiency improvements
2. Residential energy property expenditures, with a lifetime credit limit of $500 ($200 for windows and skylights)
Business Tax Breaks Extended
The following business credits and special rules are also extended:
Depreciation provisions modified and extended
These depreciation provisions are retroactively extended by the Act through 2013:
Estate, Gift and GST Tax Exclusions
The estate tax applicable exclusion, gift tax lifetime exclusion, and generation-skipping tax (“GST”) exemption all remain at $5 million, adjusted for inflation. According to unofficial estimates, the adjusted amount for 2013 should be $5,220,000.
Estate and gift tax rates increase from 35% to 40%.
The Act preserves the concept of exclusion portability. This provision allows a surviving spouse to elect to receive the unused applicable exclusion of a deceased spouse.
The annual exclusion gift amount increases to $14,000 (from 2012’s $13,000)