Client Letter: Individual Tax Provisions of the American Taxpayer Relief Act of 2012

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1 Client Letter: Individual Tax Provisions of the American Taxpayer Relief Act of 2012 Dear Client, On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 (the Act) into law. The Act is primarily a permanent extension of the 2001/2003 Bush-era income tax rates for the overwhelming majority of taxpayers. The Act permanently indexes the AMT exemption amount to the Consumer Price Index. The Act increases the estate and gift tax rate from 35% to 40%, keeps the estate and gift tax exemption unified at $5 million (indexed for inflation), and makes those exemptions permanent. It also makes permanent a 2010 provision that allows a spouse to transfer his or her estate tax exemption to a surviving spouse. The Act extends several tax credits, deductions, and exclusions that expired at the end of 2011 or were set to expire at the end of However, the Act does not extend the payroll tax holiday. The following is a summary of individual provisions that may affect your tax liability for Individual Tax Rate Provisions Income Tax Rates The Act makes permanent the 10%, 15%, 25%, 28%, 33%, and 35% marginal income tax rates for married taxpayers filing joint returns with taxable income (TI) of $450,000 or less, heads of household with TI of $425,000 or less, unmarried taxpayers with TI of $400,000 or less, and married taxpayers filing separate returns with TI of $225,000 or less. The Act creates a seventh income tax rate bracket, raising the top tax rate to 39.6% on TI over $450,000 for married taxpayers filing joint returns, TI over $425,000 for heads of household, TI over $400,000 for unmarried taxpayers, and TI over $225,000 for married taxpayers filing separate returns. These amounts will be indexed for inflation in tax years beginning after Capital Gains and Qualified Dividends Tax Rates The Act makes permanent the current capital gains and qualified dividends rates of 0% for taxpayers in the 10% and 15% income tax brackets, and 15% for taxpayers in the 25%, 28%, 33%, and 35% income tax brackets.

2 The Act raises long-term capital gains and qualified dividends tax rates from 15% to 20% for taxpayers in the 39.6% income tax bracket for both regular and alternative minimum tax purposes. Marriage Penalty Relief The Act makes permanent all marriage penalty relief provisions. Alternative Minimum Tax Relief The Act provides permanent AMT relief after 11 years of temporary patches designed to prevent the tax from affecting lower-income taxpayers. The Act makes permanent the AMT patch provision allowing all of the nonrefundable personal credits to be taken to the full extent of both regular tax and AMT liability. The Act also sets increased exemption amounts for 2012 and provides for inflation adjustments beginning in For married taxpayers filing jointly or surviving spouses, the Act sets the AMT exemption amount to $78,750 for tax years beginning in For individuals who are not married and are not surviving spouses, the Act sets the AMT exemption amount to $50,600, and for married taxpayers filing separate returns, the AMT exemption amount is set at $39,375 (1/2 the amount of married taxpayers filing jointly) for tax years beginning in Individual Credits, Deductions, and Exclusions Phase out of personal exemptions The Act reinstates the personal exemption phase out, but only for married couples filing joint returns with adjusted gross income (AGI) above $300,000, heads of household with AGI above $275,000, unmarried individuals with AGI above $250,000, and married taxpayers filing separate returns with AGI above $150,000. These amounts will be indexed for inflation in tax years beginning after Overall limitation on itemized deductions The Act reinstates the overall limitation on itemized deductions, but only for married couples filing joint returns with AGI above $300,000, heads of household with AGI above $275,000, unmarried individuals with AGI above $250,000, and married taxpayers filing separate returns with AGI above $150,000. These amounts will be indexed for inflation in tax years beginning after 2013.

3 American Opportunity Tax Credit The Act extends for five years, through 2017, the American Opportunity Tax Credit. Child Tax Credit The Act extends permanently the $1,000 credit amount (not adjusted for inflation), as well as special relief for taxpayers with three or more qualifying children. Other modifications that were made to the child tax credit by the 2001, 2003, and 2009 Acts, such as the expansion of its refundability, are extended as well. The Act extends the $3,000 earnings threshold for the refundable portion of the credit for five years, through Earned Income Tax Credit The Act extends for five years, through 2017, Bush-era and later modifications to the earned income credit, including the 45% credit percentage and reduction of marriage penalty for taxpayers with three or more qualifying children. Other Credits The Act extends permanently the 2001 EGTRRA's amendments to the following credits: Dependent care credit. Adoption credit (and exclusion from income of employer-provided adoption assistance). Employer-provided child care credit. Deductions and Exclusions Extended to 2012 and 2013 The following deductions and exclusions expired at the end of The Act extends them to 2012 and 2013: The $250 above-the-line deduction for professional expenses incurred by elementary and secondary school teachers. The above-the-line deduction for up to $4,000 of qualified tuition and related expenses. The exclusion from taxable income of debt forgiven in a foreclosure proceeding or writedown of principal on qualified principal residence indebtedness. The equalized exclusion from income for employer-provided mass transit and parking benefits. The inflation-adjusted amount for 2012 is $240 per month. Treatment of mortgage insurance premiums as qualified residence interest. The deduction for state and local general sales taxes in lieu of state and local income taxes.

4 Permanent Extension of 2001 Tax Relief In addition to the extensions mentioned above, the Act extends permanently the following changes made by the 2001 EGTRRA and the 2010 TRA: Increased ($2,000) contribution amount to Coverdell education savings accounts and expanded definition of education expenses to include elementary and secondary school expenses. Exclusion of up to $5,250 per year of employer-provided education assistance, including graduate-level courses. Elimination of 60-month limit, and increase in income limitation to $65,000 ($130,000 for joint filers) plus inflation adjustment, on student loan interest deduction. Exclusion of certain amounts received under the National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program. Increased ($15 million) arbitrage rebate exception for governmental bonds used to finance educational facilities. Expanded definition of private activity for which tax-exempt bonds may be issued, to include bonds for qualified public educational facilities. Energy Incentives Credit for Nonbusiness Energy Property The Act extends the nonbusiness energy property credit to property placed in service during 2012 and Homeowners can receive a credit for installation of numerous types of energy-saving property and appliances, including windows, doors, heat pumps, furnaces, and insulation. Homeowners can also receive a credit for certain wood-burning stoves. However, the credit is limited to specific dollar amounts for certain property and there is a lifetime $500 limit on the total credits that any taxpayer can claim. Credit for 2- or 3-Wheeled Plug-in Electric Vehicles The Act extends for 2012 and 2013 the 10% credit for both business and nonbusiness taxpayers who place in service qualified 2- or 3-wheeled plug-in electric vehicles. The credit is limited to $2,500 per vehicle. Vehicles must be manufactured primarily for use on public streets and be capable of 45 mph. The credit for low-speed 4-wheeled vehicles was not extended.

5 Renewable Energy Production Credit The Act extends the credit for production of electricity from wind facilities through The Act liberalizes the credit for all forms of renewable electricity production by changing the requirement that facilities eligible for the credit be placed in service before 2014 to a requirement that construction of the facilities begin before A parallel provision applies the same rule to taxpayers who elect the 30% energy credit in lieu of the production credit. The Act also makes technical changes to the rules for municipal solid waste and incremental hydropower facilities. Energy-Efficient New Home Credit The Act extends for 2012 and 2013 the $1,000/$2,000 per unit credit for contractors and manufacturers that construct or manufacture new energy-efficient homes. The Act also makes technical changes to the conservation requirements for such homes. Energy-Efficient Appliance Credit The Act extends for 2012 and 2013 the credit for manufacturers of certain energy-efficient appliances, but drops certain less-efficient appliances from the list of appliances eligible for the credit. Alternative Fuel Excise Tax Credit The Act extends for 2012 and 2013 a provision that allows direct payments from the Treasury of the $0.50 per gallon credit for production of certain alternative fuels. As you can see, the Act extends many, but not all, of the various provisions enacted and/or modified in 2001, 2003, 2009 and 2010, which were set to expire at the end of Please contact us so that we can review your particular circumstances in order to maximize your tax benefits for 2012, as well as discuss plans for 2013.

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