On Tuesday, January 1, 2013, the Senate passed the American Taxpayer Relief Act, H.R. 8 (the “Act”) by a vote of 89 to 8, which the House of Representatives later approved by a vote of 257–167 on Tuesday evening. The Act now goes to President Barack Obama for his signature. The Act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (EGTRRA), and Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (JGTRRA). The Act temporarily extends many tax provisions that had lapsed at midnight on December 31, 2012 and others that had expired a year earlier.
The Act retains the individual marginal tax rates under EGTRRA and JGTRRA (10%, 15%, 25%, 28%, 33%, and 35%). However, a new top rate of 39.6% is imposed on taxable income over $400,000 for those individuals filing single, $425,000 for head of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately). The Act retains the 15% rate on capital gains and dividends for taxpayers in the middle brackets and the zero rate for taxpayers in the 10% and 15% brackets. However, the Act imposes a 20% tax rate on capital gains and dividends for individuals above the top income tax bracket threshold described above.
The Act extends the unified estate, gift and generation-skipping transfer tax exclusion amount of $5 million indexed for inflation ($5.120 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. Many of you already know that under the 2010 Tax Act surviving spouses could take advantage of their deceased spouse’s unused federal estate tax exemption amount or “DSUEA” and increase their estate tax exemption by such DSUEA. This concept is called portability and the portability election must be made on a complete and properly prepared estate tax return (Form 706), which must be made within nine months of the deceased spouse’s death plus any available extension. The Act made this portability election permanent.
The Act is not all good news for taxpayers. Among the tax items not addressed by the Act was the reduction for the employees’ portion of the Social Security payroll tax, which was 4.2% and has now reverted to 6.2%. In addition to the various provisions discussed above, some new taxes also took effect Jan. 1, 2013 as a result of 2010’s health care reform legislation.
Important: The Act has many extensions for the individual and business income taxes that could not be covered in this short article. If you have any questions on individual and business tax matters, then you should contact your attorney or CPA to discuss the entire Act.