American Taxpayer Relief Act Impacts Individuals, Businesses

January 8, 2013

Good news came last week as President Obama signed the American Taxpayer Relief Act, averting the country’s descent over the “fiscal cliff.”

As the dust settles, many individuals and business owners are now taking stock. What’s in? What’s out? And, what does all this mean?

Below is a brief summary of key provisions.

Individual Provisions

  • Raises the top tax rate to 39.6% for single individuals with taxable income above $400,000 and couples with taxable income above $450,000.  The tax rates for individuals and couples with income below these thresholds do not change.
  • Raises the maximum tax rate on qualified dividends and capital gains to 20% for taxpayers whose income exceed the $400,000 and $450,000 threshold described above.
  • Reinstates the phase out of personal exemptions and itemized deductions for individuals earning more than $250,000 and couples earning more than $300,000.
  • Permanently patches the alternative minimum tax (AMT) and adjusts the exemption amount for inflation for future years.
  • Does not extend the payroll tax holiday.  Therefore, social security withholding on wages will increase from 4.2% to 6.2% on the first $113,700 of wages, effective January 1, 2013.
  • Permanently extends provisions related to student loan interest deductions, child and dependent care credits, and marriage penalty relief.
  • Temporarily extends
    • American opportunity tax credit
    • Child tax credit
    • Increased percentage for earned income tax credit
    • Deduction for teacher expenses
    • Cancellation of debt income relief for principal residences
    • Deduction for mortgage insurance premiums
    • Deduction for state and local sales tax in lieu of income taxes, if elected
    • Deduction for qualified education expenses
    • Tax-free distributions from IRA accounts for charitable purposes
    • Increased contribution limit for charitable contribution of real property for conservation purposes

Business Provisions

  • Many valuable business provisions have been extended through 2013
    • Enhanced Section 179 expensing
    • 50% bonus depreciation
    • Research and development credit
    • New markets tax credit
    • Work opportunity credit
    • Low income housing credit
    • Section 1202 Stock exclusion

Estate and Gift

  • Estate and gift exclusion remains at $5.12 million and is indexed for inflation
  • Increases maximum estate tax rate to 40%
  • Makes the portability election permanent

We will be glad to discuss how these changes impact your personal and business tax situation. Please contact your Elliott Davis tax advisor for more information.