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The American Taxpayer Relief Act

TaxAlerts Tax Article

January 2013 | Written by: Karen Reed

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On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act, averting the tax aspect of the so-called “Fiscal Cliff.” The law creates a new, higher tax bracket for upper income taxpayers and increases the tax rates for capital gains and qualified dividends for the top income brackets. In addition, itemized deduction and exemption phase-outs for the wealthy have been reinstituted, though the income thresholds have been raised.

The new law contains a number of provisions that benefit middle class taxpayers, including a permanent AMT patch and the revival of several popular tax breaks, such as the deduction for mortgage insurance premiums and the general sales tax deduction. Since the bill allows the payroll tax holiday to lapse, taxes for all wage earners and self-employed taxpayers increase by two percent for this year and beyond.

Here are just some of the highlights of the Act:

  • Single taxpayers with adjusted gross income (AGI) of $400,000 or higher, joint filers with AGI of  $450,000 and Head of Household filers with $425,000 in AGI will be subject to a higher maximum tax rate of 39.6%.
  • Capital gains and qualified dividends rates will increase from 15% to 20% for this same group of “high income” taxpayers.
  • Itemized deductions will phase-out for taxpayers with AGI of $250k, $275k and $300k or more for Single, Head of Household and Joint filers respectively.
  • There will continue to be a zero percent capital gains rate for taxpayers with incomes below certain amounts. For 2013 these amounts are expected to be $72,500 for joint filers and $36,250 for single filers.
  • AMT exemption amounts have been increased for 2012 and the law provides for annual inflation adjustments for subsequent tax years. In addition, nonrefundable personal credits will be allowed for the AMT calculation.
  • American Opportunity Tax credit has been extended through 2017.
  • The deduction for tuition and fees has been extended through 2013.
  • The two percent reduction in Social Security tax has expired.
  • The ability of taxpayers to exclude cancelled debt from taxable income under the Qualified Principal Residence Indebtedness exclusion has been extended another year, through 2013.
  • Taxpayers 70 1/2 and older will still be allowed to make a qualified charitable contribution of up to $100,000 from an IRA through 2013.
  • The expense deduction for primary and secondary school education professionals has been extended through 2013.
  • Mortgage insurance premiums will be deductible as mortgage interest through 2013.
  • The 60-month rule for the student loan interest deduction is permanently suspended, and the income limit for the phase-out has been increased. The restriction that made voluntary interest payments nondeductible has been repealed.