American Taxpayer Relief Act of 2012: Income Tax Provisions

On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012, which President Obama recently signed into law.  The Act extends a number of Bush-era income tax provisions and reinstates a number of Clinton-era income tax provisions with certain modifications. Significant items include:

• Permanent extension of the 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent individual income tax rates.
• Beginning in 2013, reinstatement of the 39.6 percent individual income tax rate for taxable income of more than $450,000 for married filing jointly filers (more than $225,000 for married filing single taxpayers), more than $425,000 for head of household filers or more than $400,000 for single filers.
• Beginning in 2013, the rate for certain long-term capital gains and qualifying dividends for taxpayers in the new 39.6 percent income tax bracket is increased to 20 percent, not including the new 3.8 percent Medicare tax on net investment income. Furthermore, there is a permanent extension of the favorable current capital gain rates (e.g., 0 percent/15 percent) for certain long-term capital gains and qualifying dividends for all taxpayers except those whose taxable income puts them in the new 39.6 percent income tax bracket.
• Beginning in 2013, reinstatement of the personal exemption phase-out (PEP) for taxpayers with adjusted gross income of more than $300,000 for married filing jointly filers (more than $150,000 for married filing single filers), more than $275,000 for head of household filers and more than $250,000 for single filers.
• Beginning in 2013, reinstatement of the repeal of the phase-out of up to 80 percent of itemized deductions for taxpayers with adjusted gross income of more than $300,000 for married filing jointly filers (more than $150,000 for married filing single filers), more than $275,000 for head of household filers and more than $250,000 for single filers.
• Permanent extension of the "marriage penalty" relief standard deduction, the 15 percent rate bracket for married filers and the earned income tax credit provisions.
• Permanent extension of the $1,000 child tax credit and a five-year extension (through 2017) of the 2009 modification that provided that earnings above $3,000 would count toward refundability.
• Permanent expansion of the student loan interest deduction and the dependent care credit.
• Permanent extension of the adoption credit and the employer-provided child care tax credit.
• Permanent patch of the alternative minimum tax (AMT) by (i) increasing the exemption amounts for 2012 to $50,600 for single filers and $78,750 for married filing jointly filers, (ii) indexing the exemption and phase-out amounts for inflation and (iii) allowing nonrefundable personal credits against the AMT.
• Five-year extension of the "third-child" earned income tax credit rules included in the American Recovery and Reinvestment Act of 2009 (ARRA) (through 2017).
• Two-year extension of the deduction for certain expenses of elementary and secondary school teachers (through 2013).
• Two-year extension of the election to deduct state and local sales tax in lieu of state and local income taxes (through 2013).
• Two-year extension of the special rule regarding contributions of capital gain real property by individuals for conservation purposes and the exclusion from gross income for distributions from an IRA that are "qualified charitable distributions" (through 2013).
• Two-year extension of the qualified tuition deduction (through 2013).
• Two-year extension of the deduction for mortgage insurance premiums (through 2013) and a one-year extension of the mortgage debt relief provisions (through 2013).
• Two-year extension of the increase in the monthly exclusion for employer-provided van pool and transit pass benefits (through 2013).
• Beginning in 2013, the employee Social Security tax rate will revert to 6.2 percent (from the stimulus level of 4.2 percent) for wages up to $113,700.

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