January 11, 2013

Written By: Francis J. Sullivan and Lisa K. Schubel

Just before midnight on January 1, 2013, the American Taxpayer Relief Act of 2012 (hereinafter the “Act”) was adopted by the House of Representatives averting the so-called “fiscal cliff.” The Act was signed into law by President Obama on January 2, 2013. The Act makes permanent the lower Bush-era income tax rates for all except those at upper income levels, establishes caps on deductions and credits for those at upper income levels and sets permanent exemption levels for Federal estate, gift and generation-skipping transfer (hereinafter “GST”) tax. The Act does not, however, address federal spending or debt control and instead, leaves that for further negotiations and legislation. Key elements of the Act follow.

Individual Income Tax Provisions

• Social Security tax withholding increases to 6.2% from 4.2% in 2012 on wages up to $110,000.
• Taxable income in excess of $400,000 ($450,000 for married couples) will be taxed at a new 39.6% tax bracket. All other individual marginal tax rates existing at the end of 2012 will remain the same at 10%, 15%, 25%, 28%, 33% and 35%. All tax bracket ranges will be adjusted for inflation after 2013.
• The top rate for long-term capital gains and qualified dividends is raised to 20% from 15% for individuals in the highest tax bracket (39.6%).
• Permanent Alternative Minimum Tax (hereinafter “AMT”) relief in that the AMT now applies only to a person with taxable income in excess of $50,600 ($78,750 per married couple) at an AMT tax rate of 26% or 28% depending upon income.
• The so called “Pease” limitation on itemized deductions is revived so that if an individual has adjusted gross income in excess of the threshold $250,000 ($300,000 for married couples), the amount of itemized deductions is reduced by the lesser of either 3% of the excess of adjusted gross income over the threshold or 80% of the itemized deductions otherwise allowable. This limitation is not applicable to deductions for investment interest, casualty loss or medical expenses.
• The personal exemption phase-out rules are also revived so that an individual’s personal exemption will be reduced by 2 percentage points for each $2,500 by which the individual’s adjusted gross income exceeds $250,000.
• The income tax deduction for charitable gifts remains intact. For 2013, charitable gifts up to $100,000 may be made directly from an IRA to a charity by an individual over age 70 ½. • $1,000 child tax credit extended permanently.
• Child and dependent care credit extended permanently with the 35 % credit rate with a $3,000 cap on expenses for one qualifying individual or $6,000 cap for two or more qualifying individuals.
• American Opportunity Credit and the Earned Income Credit extended for 5 years.
• The following deductions and credits were extended through 2013: deduction for state sales tax; above-the-line deduction for school teacher expenses ($250); above-the-line deduction for qualified tuition and related expenses; employer-provided mass transit and parking benefits; exclusion from income of up to $2,000,000 of forgiven debt on an individual’s principal residence if the debt discharged is the result of declining value or the taxpayer’s declining financial condition; non-business energy property credit for energy-efficient homes.

Federal Estate, Gift and GST Taxes

• The Act permanently provides for a maximum federal estate tax rate of 40% with a $5 million exclusion (indexed annually for inflation) for estates of decedents dying after December 31, 2012. The estate tax exemption amount for 2013 is $5,250,000 per individual ($10,500,000 per married couple).
• Portability of estate tax exemption between spouses is made permanent. A surviving spouse is allowed to aggregate the unused estate tax exemption of a deceased spouse with the surviving spouse’s exemption.
• Gift tax remains unified with the estate tax with a 40% tax rate and a gift tax exemption amount of $5 million (indexed for inflation) for gifts made after December 31, 2012. The gift tax exemption amount for 2013 is $5,250,000 per individual.
• GST tax rate is 40% with a $5 million (indexed for inflation) exemption. The GST exemption amount for 2013 is $5,250,000.
• GST tax-related provisions scheduled to expire after 2012 were extended including GST deemed allocation and retroactive allocation rules; clarification of valuation rules with respect to the determination of the inclusion ratio for GST tax purposes; provisions allowing for a qualified severance of a trust for purposes of the GST tax; and relief from late GST allocations and elections.

Business Tax Provisions

• The Code Sec. 179 small business expensing is extended through 2013. The dollar limit for tax years 2012 and 2013 is $500,000 with a $2 million investment limit.
• 50% bonus depreciation extended through 2013.
• Research and development tax credit extended through 2013.
• Other business tax extenders retained through 2013 include: domestic production activities deduction, new markets tax credit; work opportunity tax credit; employer wage credit for activated military reservists; reduced recognition period for S corporation built-in gains tax; renewable electricity production tax credit as well as other energy related credits.

The above summarizes only some of the more significant tax related provisions of the Act. This summary is not intended to be all inclusive and should not be relied upon for purposes of making tax or estate planning decisions. We encourage you to contact Francis J. Sullivan, Esq. or Lisa K. Schubel, Esq. for more information on how this tax bill affects you.

To view The American Taxpayer Relief Act of 2012 click here.

About Hill Wallack LLP

Hill Wallack LLP has built a reputation for problem-solving and aggressive advocacy. With offices in Princeton, N.J. and Yardley, Pa., the firm has comprehensive commercial capabilities and deep experience in a number of industry sectors. Our attorneys have extensive government experience, and the firm represents businesses and public entities in many areas in which public and private interests intersect.

When called upon to tackle tough legal and business challenges, we do more than advise on the law—we create real-world solutions.

For more information, contact either:

Francis J. Sullivan, Esq.
(215)579-9247

Lisa K. Schubel, Esq.
(267)759-2072

This article provides information of general interest and is not intended, and should not be used, as a substitute for consultation with legal counsel. Any questions regarding the specific issues raised in this article should be directed to the authors or to your contacts at Hill Wallack LLP.