The American Taxpayer Relief Act of 2012

Based on the titles of the tax laws, we should have so much relief by now that there should be no taxes at all.  We all know that will never happen.  So, here are some of the highlights of the American Taxpayer "Relief" Act of 2012 (the "2012 Act") that the president signed on January 3, 2013.

Payroll Taxes.  The change that will affect the greatest number of taxpayers is the expiration of the payroll tax holiday.  In 2011 and 2012 the social security portion of the payroll tax paid by employees was reduced from 6.2% to 4.2%.  The 6.2% rate has been reinstated, which most people should have noticed in their first paycheck of 2013.  The social security wage base for 2013 is $113,700.

Income Tax Rates.  Here are the new rates and brackets for 2013:

Rate        Single Filers            Married Joint Filers

10%        $0 to $8,925            $0 to $17,850

15%        $8,925 to $36,250        $17,850 to $72,500

25%        $36,250 to $87,850        $72,500 to $146,400

28%        $87,850 to $183,250    $146,400 to $223,050

33%        $183,250 to $398,350    $223,050 to $398,350

35%        $398,350 to $400,000    $398,350 to $450,000

39.6%        $400,000 and up        $450,000 and up

Capital Gains and Dividend Tax Rates.  Capital gains and qualified dividend tax rates remain the same except for taxpayers in the new 39.6% income tax bracket.  Their rate on capital gains and qualified dividends increases to 20%.

Phaseouts.  Before 2006, itemized deductions could be reduced by up to 3% based on your income.  The phaseouts were themselves phased out, so that in 2012 there were no phaseouts.  Now the phaseouts are back for single taxpayers with adjusted gross income ("AGI") of more than $250,000 and married taxpayers filing jointly with AGI of more than $300,000.  The phaseout for itemized deductions reduces total itemized deductions by 3% of excess income over the AGI threshold.  The personal exemptions phaseout reduces personal exemptions by 2% of the total exemptions for each $2,500 of excess income over the AGI threshold.  Each of these phaseouts can increase an individual's marginal tax rate by about 1%.

Alternative Minimum Tax.  The original minimum tax law was passed in 1969 and was intended to apply to 155 U.S. taxpayers who were perceived to not be paying enough income tax.  The current alternative minimum tax ("AMT") law was passed in 1982, but did not include adjustments for inflation.  This caused the AMT tax to affect millions of taxpayers.  Over the years Congress passed numerous one year "patches" to the AMT to prevent its unintended application to middle class taxpayers.  The 2012 Act finally included a "permanent" fix for the AMT.  (I use quotation marks because nothing prevents future changes to the tax laws.)  The exemptions have been increased to $50,600 for individuals and $78,750 for married couples.  These amount will be adjusted for inflation in future years.  "According to one GOP estimate, 28 million families would have had to pay an average of $3,400 in extra taxes this year without the AMT fix.  About 4 million taxpayers owed the AMT in 2011, up from about 1.3 million in 2001, according to the Tax Policy Center."  Time,  http://business.time.com/2013/01/03/at-long-last-a-permanent-patch-for-a-dreaded-tax/.

Estate and Gift Taxes.  There was some actual relief in the area of estate and gift taxes.  The 2012 Act retains most of the 2010 law that was set to expire on January 1, 2013.  The estate and gift tax exemption for each person was set at $5,000,000 in 2011 and increases each year based on inflation.  The 2012 amount was $5,120,000/person, and the amount for 2013 is $5,250,000.  The estate and gift tax rate, however, was increased from 35% to 40%.  The annual gift tax exclusion amount continues to increase with inflation, and the amount for 2013 is $14,000.

The 2012 Act also make portability "permanent."  In general, portability allows for a surviving spouse to use the estate tax exemption of a deceased spouse.  For example, if husband dies in 2013 with a $3,000,000 estate and leaves everything to his wife, then husband will not use any of his estate tax exemption amount.  Before portability, husband's estate tax exemption would have been lost.  Under portability, wife will have her own estate tax exemption and husband's unused exemption of $5,250,000.  However, wife could lose husband's exemption if she remarries.

The Illinois estate tax exemption amount increased to $4,000,000 on January 1, 2013.  It is not scheduled to increase beyond this amount.

Patient Protection and Affordable Care Act.  In addition to the 2012 Act, the Patient Protection and Affordable Care Act ("Obamacare") imposes several new taxes starting on January 1, 2013.

Medicare Tax.  An additional Medicare tax of .9% is added to wages above $250,000 for married couples and $200,000 for individuals.  This is on top of the 1.45% Medicare tax each individual already pays on all wages and the 1.45% Medicare tax the employer pays.

Investment Income Tax.  An additional 3.8% tax is added to investment income on married taxpayers with AGI of $250,000 and single taxpayers with AGI of $200,000.  Investment income includes items such as interest and dividends.

Medical Device Manufacturing Tax.  A 2.3% tax will be applied to the gross sales of medical device makers.  This includes all medical devices, with the exclusion of glasses and contact lenses.

Other changes include a new threshold of 10% of AGI (up from 7.5%) for deducting medical expenses and an annual cap of $2,500 for flexible spending accounts.

There are many, many more extensions and changes in the tax laws for 2013.  Consult your tax professional to make sure you minimize you tax burden.