American Taxpayer Relief Act of 2012 (HR 8) New Tax Provisions for 2013

On Jan. 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, averting most of the tax provisions of the fiscal cliff. The new law, among other items, permanently extends the bulk of the Bush-era tax cuts on income below $450,000 for joint filers (below $400,000 for single filers), permanently amends the alternative minimum tax, extends various tax incentive programs, and establishes a permanent maximum 40 percent unified estate and gift tax with an inflation-adjusted $5 million portable, individual exemption. Most of the law's provisions are effective as of the beginning of 2013, with some tax benefits reinstated as of Jan. 1, 2012. Starting in 2013, high-income taxpayers are subject to (i) increased income tax rates on ordinary income, dividends and capital gain; and (ii) a phase-out of itemized deductions and personal exemptions.

NEW 2013 INCOME TAX PROVISIONS

• Income Tax Increases and Phase-Out/Limitations of Itemized Deductions and Personal Exemptions for High-Income Taxpayers. The 2012 income tax rates, personal exemption and itemized deductions remain intact, except for specified high-income taxpayers. For taxpayers filing joint returns, the new maximum tax rates are as follows, with the taxable income thresholds indexed for inflation after 2013 (applicable threshold is $400,000 for single filers):

• Maximum 2013 Income and Medicare Tax Rates – Net Investment Income. In addition to the taxes imposed by the Act, effective in 2013 a new 3.8 percent Medicare tax is levied on the lesser of an individual's (i) net investment income; or (ii) the excess of the individual's "modified adjusted gross income" (generally equal to adjusted gross income, or AGI) over $250,000 for joint filers (over $125,000 for single individuals).

The maximum 2013 federal income tax rates for joint filers (excluding the impact of any phase-out of itemized deductions and personal exemptions) imposed on net investment income are:

• Increased 2013 0.9 Percent Medicare Tax. Beginning in 2013, a new 0.9 percent Medicare tax is imposed on annual compensation above $250,000 for joint filers (above $125,000 for singles).
• Payroll Tax Increase. The pre-2013 payroll tax holiday was terminated in 2012 by reinstating the 6.2 percent employee half of the social security payroll tax (increased from 4.2 percent).
• Phase-Out of Itemized Deductions and Personal Exemptions. After 2012, high income taxpayers are subject to (i) a personal exemption phase-out (PEP) that reduces exemptions by two percent for each $2,500 by which AGI exceeds an applicable threshold; and (ii) reduced itemized deductions (the so-called "Pease limitations") equal to three percent of the amount by which the AGI exceeds a specified threshold amount, with the total reduction not to exceed 80 percent of the otherwise allowable itemized deductions. The applicable thresholds (adjusted for inflation after 2013) are: (i) $300,000 for joint filers and a surviving spouse; (ii) $250,000 for single filers; (iii) $275,000 for heads of household; and (iv) $150,000 for married taxpayers filing separately.

OTHER 2013 INCOME TAX PROVISIONS

The Act includes numerous other income tax provisions, including:

Providing permanent alternative minimum tax relief by increasing the AMT exemptions amounts (indexed for inflation) retroactively to 2012.

• Extending and modifying the 50 percent bonus depreciation provisions for one year so that it applies to qualified property placed in service before 2014 (before 2015 for certain aircraft and long-production-period property) and extending through 2013, the section 179 asset expensing at $500,000.
• Extending the section 1202 stock exclusion at 100 percent for qualified small business stock acquired in 2012 and 2013.
• Reducing the S corporation recognition period for the section 1374 built-in gain tax from a 10-year period to a five-year period for disposition of S corporation assets during 2012 and 2013.
• Modifying and retroactively extending the section 41 research credits for two years through 2013.
• Extending through 2013 the following additional individual tax benefits: (i) reinstating for 2012 and 2013, the option to deduct state and local general sales taxes by individuals; (ii) relief from cancellation of debt income for principal residences; (iii) deduction for mortgage insurance premiums as interest; and (iv) tax-free distributions from IRA accounts for charitable purposes.
• Extending through 2013 certain energy tax incentives that expired at the end of 2011.

NEW 2013 ESTATE AND GIFT TAX PROVISIONS

The Act permanently retains the unified gift and estate tax exemption at $5 million (as indexed for inflation, which is $5.25 million in 2013) and permanently increases the top estate and gift tax rate from 35 percent to 40 percent. Under the Act, the generation-skipping transfer tax rate is increased from 35 percent to 40 percent and the GST exemption is $5 million (as indexed for inflation, and is $5.25 million in 2013). The Act also continues the portability feature that allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse. All changes are effective for individuals dying and gifts made after 2012.

If you have questions related to the new 2013 income/Medicare taxes, the other income tax provisions of the Act, or other income tax issues, please contact Michael J. Donohue ([email protected] or 214.999.4231) in Gardere's Dallas office, James Howard ([email protected] or 713.276.5391) in Gardere's Houston office, or any other member of the Gardere Tax Team.

Any questions related to the estate and gift tax provisions of the Act or other gift and estate tax issues, please contact Keith V. Novick ([email protected] or 214.999.4238) in Gardere's Dallas office, Lawrence J. Pirtle ([email protected] or 713.276.5721) in Gardere's Houston office, or any other member of the Gardere Trust and Estate Planning Team.