The American Taxpayer Relief Act of 2012

The new year started with some political drama, as Congress passed legislation on January 1, 2013, to prevent the country from going over the “fiscal cliff.” The American Taxpayer Relief Act of 2012 (ATRA) permanently extends a number of major tax provisions and temporarily extends many others. The legislation also temporarily postpones major automatic spending cuts that were scheduled to take place at the beginning of the year. Here’s what you need to know.

Permanent federal income tax rates

For most individuals, the legislation permanently extends the lower federal income tax rates that have existed for the last decade. That means most taxpayers will continue to pay tax according to the same six tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) that applied for 2012. The top federal income tax rate, however, will increase to 39.6% beginning in 2013 for individuals with income that exceeds $400,000 ($450,000 for married couples filing joint returns).

Long-term capital gains and dividends

Generally, the lower tax rates that applied to long-term capital gains and qualifying dividends have been permanently extended for most individuals as well. If you’re in the 10% or 15% marginal income tax bracket, a special 0% rate generally applies. If you are in the 25%, 28%, 33%, or 35% tax bracket, a 15% maximum rate generally applies. Beginning in 2013, however, those who pay tax at the higher 39.6% federal income tax rate (i.e., individuals with income that exceeds $400,000, or married couples filing jointly with income that exceeds $450,000) will be subject to a maximum rate of 20% for long-term capital gains and qualifying dividends.

Alternative minimum tax (AMT)

ATRA permanently extends AMT relief, retroactively increasing the AMT exemption amounts for 2012, and providing that the exemption amounts will be indexed for inflation in future years. The Act also permanently extends provisions that allowed nonrefundable personal income tax credits to be used to offset AMT liability.

Estate tax

The new legislation makes permanent the exemption amounts ($5 million, indexed for inflation) for the estate tax, the gift tax, and the generation-skipping transfer tax–the same exemptions that were in effect for 2011 and 2012. The top tax rate, however, is increased to 40% (up from 35%) beginning in 2013. The Act also permanently extends the “portability” provision in effect for 2011 and 2012 that allows the executor of a deceased individual’s estate to transfer any unused exemption amount to the individual’s surviving spouse.

Itemized deductions and personal exemptions

ATRA provides that, beginning in 2013, personal and dependency exemptions will be phased out for those with incomes exceeding specified income thresholds. Similarly, itemized deductions will be limited. For both the personal and dependency exemptions phaseout and the itemized deduction limitation, the threshold is $250,000 for single individuals ($300,000 for married individuals filing joint federal income tax returns).

No extension of 2% payroll tax reduction

Many workers were surprised when they received their first 2013 paycheck. That’s because one thing the new legislation did not do was extend the temporary 2% reduction in the Social Security (OASDI) portion of the FICA payroll tax that expired at the end of 2012. As a result, most workers are now receiving about 2% less in take-home pay.

Other provisions

The new legislation extends a host of other tax provisions that had expired–some are extended permanently, others temporarily. For more information, contact a tax professional or visit www.irs.gov.