ATRA (American Taxpayer Relief Act) Summary
Yesterday early in the morning, the Senate passed H.R.8, the "American Taxpayer Relief Act" by a vote of 89-8, and the House of Representative passed the bill later in the day by a vote of 257 to 167. While the bill simply kicks the can down the road once again in many ways (we have a few more "cliffs" coming in the next two months by way of budget sequestration and debt limits), it also contains some really interesting tax provisions which are positive for many taxpayers. Importantly, most of the bill's provisions are PERMANENT, enabling us to finally do some solid planning work after a decade of one temporary measure after another. Of course "permanent" means "until changed by Congress"; but there are no longer any sunset provisions waiting for us down the road. The President is expected to sign this bill into law quickly.
Here are the major provisions of the tax bill:
- The top tax rate is rising to 39.6% on income above $400,000 for individuals and $450,000 for married couples. These income thresholds will be indexed for inflation in future years. Keep in mind that these thresholds are for taxable income, not adjusted gross or total income.
- All other tax brackets wills stay at the current levels of 10%, 15%, 25%, 28%, 33% and 35% for all taxpayers.
- These tax bracket changes are permanent.
- The 2012 estate tax exemption of $5,120,000 is now permanent, and will be adjusted for inflation in 2013 and forward.
- Portability rules were made permanent. Meaning spouses may use both of their exemptions, totaling over $10 million, without the need for bypass trusts.
- The top estate tax rate increased from 35% to 40%. This is not relevant for any families below the above exemption amounts.
Capital Gains and Dividends
- The current 0% and 15% capital gains tax rates are now permanent for any gains below the $400,000/$450,000 thresholds.
- Capital gains rate of 20% applies to long-term gains that fall into the new 39.6% top income tax bracket.
- Current qualified dividend tax rates (15%) are also made permanent, with a new 20% rate for dividends above the $400k/$450k threshold — same as the capital gains tax rates.
- Keep in mind that the new 3.8% Medicare tax on investment income (Code Sec. 1411) still applies for those with a modified adjust gross income over the $250,000 married and $200,000 single thresholds (http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs), making the effective dividend and gains rates 18.8% and 23.8% for those with high income levels.
- The never-ending AMT patches are now made permanent.
- AMT exemption amounts will be $78,750 for married couples and $50,600 for singles, and will be indexed for inflation.
Roth Conversions within a 401(k) Plan
- NEW RULE: Individuals can now convert 401(k) plan balances to a Roth 401(k), if offered by the employer, without needing to be eligible for a distribution out of the 401(k) plan. Essentially an "in-service" "intra-plan" Roth conversion.
IRA Charitable Distributions
- Charitable IRA distributions (limited to $100,000 and the age 70 1/2 requirement), which expired at the end of 2011, has been reinstated.
- The reinstatement is RETROACTIVE, and charitable distributions made through February 1, 2013 can be counted for the 2012 tax year. Although the benefit of this may not be great since most IRA owners will have already satisfied their required minimum distributions for 2012.
The above items are all largely positive for taxpayers, particularly when compared to where the rates were headed if the previous tax breaks had been allowed to expire. Among the few negative changes buried in the bill are the following:
Payroll Tax Cut NOT Extended
- The 2% payroll tax cut we have enjoyed for the past two year is not being extended. Payroll taxes will return to the long-time rate of 6.2% for 2013.
Deductions and Exemptions Phaseout
- The phaseout of itemized deductions and personal exemptions returns for 2013, as expected. The new adjusted gross income thresholds for the phaseout are $250,000 for individuals and $300,000 for married couples, indexed for inflation.
The full text of the 154 page tax bill can be found here: