• Highlights of the Federal Response to the Fiscal Cliff
  • January 8, 2013 | Author: Scott R. Townsend
  • Law Firm: Stites & Harbison, PLLC - Louisville Office
  • On January 1, 2013, the U.S. Senate and the U.S. House of Representatives approved The American Taxpayer Relief Act (the “Act”) in a last-ditch effort to respond to tax increases that were implemented after the United States went over the “fiscal cliff” effective January 1, 2013.  The Act is expected to be signed into law by President Obama in the coming days and contains a variety of provisions that will impact businesses and business owners, including the following: 

    Federal Individual Income Tax Rates.  Federal income tax rates will increase to 39.6% from 35% for individuals with taxable income exceeding $400,000 (or $450,000 for married taxpayers filing jointly).

    Itemized Deductions.  The personal exemption is phased out for individuals having over $250,000 in taxable income and joint filers having over $300,000 in taxable income, and there is also a complicated limitation on permitted itemized deductions (e.g., deductions for charitable donations and payments of mortgage interest) eliminating up to 80% of deductions for individuals and couples hitting those same taxable income benchmarks. 

    Business Deductions and Credits.  The Act extends through 2013 the maximum deduction level for bonus depreciation, the permitted allowance under Section 179 of the Internal Revenue Code for the immediate expensing of qualifying software and equipment purchases or leases, and certain business tax credits such as the Research and Development tax credit, the Work Opportunity Tax Credit, and tax breaks related to renewable energy technologies and retail/restaurant improvements.   

    Capital Gains and Dividends.  Individuals having taxable income in excess of $400,000 (and joint filers having taxable income in excess of $450,000) will pay an increased federal tax rate on dividends and capital gains of 20%, an increase from 15% in 2012.  For taxpayers with taxable income below these thresholds, federal tax rates on dividends and capital gains will remain unchanged from 2012.

    Estate Taxes.  The federal estate tax rate is set permanently at 40%, which will be assessed on estates in excess of the exemption amount of $5 million.  The exemption amount will be adjusted annually for inflation.

    Alternative Minimum Tax.  A permanent “patch” to the Alternative Minimum Tax is implemented, with the AMT exemption amount also to be adjusted annually to account for inflation beginning in 2013. 

    Several items were notably not impacted by the Act, such as the reduction in the employee portion of the Social Security tax, which was not extended for 2013 so that this rate  will return to 6.2% in 2013 from 4.2% in 2012.  No change was made to the new 0.9% Medicare tax on wages over $200,000 for single filers (and $250,000 joint filers) or the 3.8% tax on net investment income, both of which will become effective in 2013.