American Taxpayer Relief Act of 2012 Signed Into Law

Our elected representatives have finally done it…

Yes the double entendre is intended…Congress finally passed a bill to take steps to address a portion of the “Fiscal Cliff” issues, and the President signed the American Taxpayer Relief Act of 2012 into law yesterday. The details of this portion of their efforts are listed below. Notably absent are spending cuts; however, the need to address the cuts is referenced by putting those off for another two months – and for the next Congress.

Details of the legislation include raising taxes by about $600 billion over 10 years compared with tax policies that expired at midnight Monday. It would also delay for two months across-the-board spending cuts otherwise set to begin slashing the budgets of the Pentagon and numerous domestic agencies.

Highlights include:

  • Tax rates will permanently rise to Clinton-era levels (39.6%) for families with income above $450,000 and individuals above $400,000. All income below the threshold will permanently be taxed at Bush-era rates.
  • The tax on capital gains and dividends will be permanently set at 20 percent for those with income above the $450,000/$400,000 threshold. It will remain at 15 percent for everyone else.
  • The estate tax will be set at 40%, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012, such estates were subject to a top rate of 35%.
  • The sequester will be delayed for two months. Half of the delay will be offset by discretionary cuts, split between defense and non-defense. The other half will be offset by revenue raised by the voluntary transfer of traditional IRAs to Roth IRAs, which would tax retirement savings when they’re moved over.
  • The pay freeze on members of Congress, which Obama had lifted earlier this year, will be re-imposed.
  • The 2009 expansion of tax breaks for low-income Americans: the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit will be extended for five years.
  • The Alternative Minimum Tax will be permanently patched.
  • The bill does not address the debt-ceiling.
  • The payroll tax holiday will be allowed to expire.
  • Two limits on tax exemptions and deductions for higher-income Americans will be re-imposed: Personal Exemption Phase-out (PEP) will be set at $250,000 and the itemized deduction limitation (Pease) kicks in at $300,000.
  • The full package of temporary business tax breaks — benefiting everything from R&D and wind energy to race-car track owners — will be extended for another year.
  • Scheduled cuts to doctors under Medicare would be avoided for a year through spending cuts that haven’t been specified.
  • Federal unemployment insurance will be extended for another year, benefiting those unemployed for longer than 26 weeks. This $30 billion provision won’t be offset.

We encourage you to consult your Anders tax advisor to discuss how this affects your tax situation and what planning steps are available to you.