A brief summary of the key provisions in The American Taxpayer Relief Act of 2012

Recently, President Obama signed into law the "The American Taxpayer Relief Act of 2012" (the Act), which Congress passed on New Year's Day to avoid the fiscal cliff. Below is a brief summary of the key provisions of this new law. Individual Income Tax Rates For tax years beginning in 2013 and beyond, the top tax rate is increased to 39.6% (up from 35%) for individuals with taxable income over $400,000 and married couples with taxable income over $450,000 ($425,000 for heads of household, $225,000 for married taxpayers filing separately). These dollar amounts are inflation-adjusted for tax years after 2013. The lower income tax rates in effect for all other taxpayers were made permanent. Capital Gains/Dividends Beginning in 2013, the top rate on capital gains and qualified dividends is increased to 20% (up from 15%) for taxpayers in the 39.6% tax bracket. Payroll Tax Holiday Ends The 2% cut in the Social Security tax for all earners up to the Social Security wage base ($113,700) was not extended into 2013. The rate will revert back to 6.2% Limitation on Itemized Deductions and Personal Exemption Phase-out Reinstated for High-Income Taxpayers Individual taxpayers with adjusted gross income (AGI) over $250,000 and married couples with AGI over $300,000 ($275,000 for heads of household, $150,000 for married taxpayers filing separately) must reduce their otherwise allowable itemized deductions by 3% of the amount by which their AGI exceeds these thresholds (not to exceed 80% of itemized deductions). In addition, the total amount of exemptions that may be claimed by such taxpayers is reduced by 2% for each $2,500 by which the taxpayer's AGI exceeds the above thresholds. The AGI thresholds for both of these provisions are adjusted for inflation for tax years after 2013. Permanent AMT Relief The Act permanently increases the alternative minimum tax (AMT) exemption amounts for tax years beginning in 2012 ($50,600 single, $78,750 married, and $39,375 married filing separately) and provides for an annual inflation adjustment for tax years after 2012 ($51,900 single, $80,750 married, and $40,375 married filing separately). In addition, nonrefundable personal tax credits may now be used to fully offset the taxpayer's regular tax and AMT liability. Enhanced Code Section 179 Small Business Expensing Under the Act, the dollar limit for 2012 was retroactively increased to $500,000 (up from $139,000) and extended through 2013 (up from $25,000). For both years, the investment limitation is increased to $2 million (up from $560,000 in 2012 and $200,000 in 2013). 50% Bonus Depreciation Extended Through 2013 The Act extends 50% bonus depreciation for qualified property placed in service before January 1, 2014. Extension of 15-Year Straight-Line Cost Recovery Period for Qualified Leasehold Improvements Under the Act, the 15-year recovery period for qualified leasehold improvement property, qualified restaurant buildings and improvements, and qualified retail improvements was extended through 2013 (for property placed in service before January 1, 2014). Permanent Extension of the $5 Million Transfer Tax Exemption Under the Act, the inflation adjusted $5 million federal estate, gift and GST tax exemption was made permanent for transfers made after 2012, however the top tax rate was increased to 40% (up from 35%). Also made permanent was the portability feature which allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse (effectively $10 million for married couples). Extension of Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness Under the Act, the exclusion from gross income for discharge of principal residence indebtedness was extended for one year to indebtedness discharged before January 1, 2014. Extension of Certain Individual Tax Benefits Through 2013 Some popular tax provisions that were extended through 2013 include: parity for employer-provided mass transit benefits, deduction for mortgage insurance premiums as interest, election to deduct state and local sales taxes in lieu of income taxes, above the line deduction for qualified education expenses, and tax-free distributions from IRA accounts for charitable purposes. Sandy Klein, CPA, is a partner at Shanholt Glassman Klein Kramer & Co., New York, N.Y.