New Tax Provisions: Fiscal Cliff Averted – Sequestration Resumes in Two MonthsJanuary 2013 – Advisories
On January 1, 2013, Congress passed H.R. 8, the American Taxpayer Relief Act of 2012 to avert the immediate tax increases and spending cuts (i.e., the so-called “fiscal cliff”) that were otherwise scheduled to take effect January 1, 2013. Although averting the fiscal cliff, the legislation merely delayed the automatic sequestration of spending cuts until March 1, 2013. The need to raise the debt ceiling also looms large and ensures more Washington political football in the coming months.
Highlights of the Act are described in general terms below:
- Income Tax Rates. The 2001 and 2003 Bush tax cuts become permanent except for Individuals and Married-Filing Jointly whose taxable income equals or exceeds $400,000 or $450,000, respectively (indexed for inflation). For incomes in excess of the thresholds, the ordinary income rate rises to 39.6% and the long-term capital gain and Qualified Dividend rate rises to a maximum of 20%.
- Itemized Deduction Haircut. The Section 68 reduction of individual itemized deductions returns. In general, deductions are reduced by 3% of the amount by which an individual’s or couple’s Adjusted Gross Income exceeds thresholds of $250,000 and $300,000, respectively. The threshold amounts are indexed for inflation.
- Personal Exemption Phase-Out. The personal exemption phase-out returns. Exemptions are phased out at the rate of 2% of Adjusted Gross Income in excess of the new Section 68 thresholds.
- Estate, Gift, and Generation-Skipping Transfer Taxes. Estate, gift, and generation-skipping transfer tax exemptions are set at $5 million and indexed annually for inflation for 2012 and subsequent years. The maximum tax rate for all such taxes is set at 40%. Portability, which allows the estate of the first spouse to die to transfer his or her unused estate tax exemption to the surviving spouse, is made permanent.
- AMT. The 2012 Alternative Minimum Tax exemption amounts are extended permanently and indexed for inflation.
- Roth Conversions. The legislation expands the scope of qualified plans that can be converted to a Roth IRA in a taxable conversion. Specifically it allows an individual to elect any amount in a non-Roth account to be converted to a Roth account in the same plan, whether or not the amount is otherwise distributable because the individual is not at least age 59 ½ or has not separated from service.
Each of the last several years Congress has passed a series of specific tax breaks one year at a time. The Act continues the practice of granting short-term extensions of these tax benefits, this time covering both 2012 and 2013.
- Individual Extenders. Nine extenders relate to individual tax benefits including (i) exclusion for cancellation of debt on qualified principal residence; (ii) special conservation easement deductions; and (iii) use of IRAs for charitable donations.
- Business Extenders. Thirty-one extenders relate to business-oriented tax benefits including (i) research credit; (ii) new market tax credit; (iii) 15-year depreciation for qualified leasehold, restaurant, and retail improvements; (iv) continue the $500,000 limit for expensing and 50% bonus depreciation; and (v) continue 100% gain exclusion for section 1202 small business stock.
- Energy Tax Extenders. Twelve-extenders relate to alternative energy incentives including (i) cellulosic bio-fuel producer credit; (ii) incentives for biodiesel; and (iii) wind and certain renewable energy production credit.
- Low Income Housing. A Section 42 low income housing tax credit benefit was also extended. Specifically the 9% credit will be available for any credit allocation made before January 1, 2014. Projects receiving these credit allocations need not be placed in service on or before December 31, 2013, as was previously required.
- International. Extenders also included the look-through rule under Section 954(c)(6), which has been extended to include subsidiary taxable years beginning before January 1, 2014. This rule will generally allow US corporations with foreign subsidiaries to move active business income among those subsidiaries without immediate US tax.
- S Corporations. S corporation charitable contributions made before December 31, 2013 will continue to only reduce a shareholder’s basis by the shareholder’s pro rata share of the S corporation’s basis in the donated property (rather than by the shareholder’s share of the fair market value of the donated property). For determining whether the former C corporation “sting” tax applies to gains recognized in 2012 and 2013, the built-in gain period is reduced from 10 to 5 years.
Other new tax items for 2013
- Payroll Tax Holiday Ended. The 2% reduction in employee’s share of Medicare taxes from 2011 and 2012 was not extended.
- Higher Medicare Tax. The Patient Protection and Affordable Care Act of 2010 established a new “Additional Medicare Tax” of 0.9%, effective January 1, 2013.
3.8% Net Investment Income Tax. The Patient Protection and Affordable Care Act of 2010 also created a new 3.8% tax on net investment income, effective January 1, 2013.
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This advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.
Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.
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