Summary of Tax Changes Under American Taxpayer Relief Act of 2012

           (1)    Ordinary Income.         Beginning in the 2013 taxable year, single taxpayers with ordinary income over $400,000 and married taxpayers filing jointly whose income exceeds $450,000 will be subject to a new higher 39.6 percent tax rate. [These thresholds will be adjusted for inflation.]

          (2)    Capital Gains.       The maximum rate on long term capital gains and qualifying dividends will remain at 15 percent for most taxpayers, but will increase to 20 percent, again for single taxpayers whose income exceeds $400,000, and married filing jointly taxpayers whose income exceeds $450,000.

            (3)    New Medicare Tax.        A new 3.8 percent Medicare tax will be imposed on  “net investment income” when modified adjusted gross income exceeds $200,000 for single, and $250,000 for married filing jointly taxpayers.  Net investment income includes income from the following sources: (i) capital gains, (ii) dividends, (iii) interest, (iv) retirement income; (v) rental income, and (vi) other passive income.  IRC Section 1411.  Proposed Regulations provide that “to the extent gain from a like-kind exchange is not recognized for income tax purposes under Section 1031, it is not recognized for purposes of determining net investment income under Section 1411.” Prop. Regs. §1.1411-5(C)(i)(2)(ii).

                (a)    “Investment Income”.    Investment Income includes “Net Gain”.  IRC §1402(C)(1)(A)(iii) provides that the 3.8 percent Medicare Tax includes “net gain” attributable to the disposition of property that qualifies as a capital asset under IRC §1221, as well as gains from ordinary income that do not so qualify.

            (4)    Reinstatement of Phase-Out on Itemized Deductions.        Beginning in 2013, itemized deductions will again be phased out. Three factors determine the phaseout: First, the “threshold” amount which, for single filers, is $250,000, and $300,000 for joint filers. [The thresholds will be adjusted for inflation.] Second, the percentage limitation, which is 3 percent for all taxpayers, regardless of filing status. Third, the taxpayer’s adjusted gross income (AGI). The reduction in itemized deductions equals three percent of the difference between AGI and the threshold amount. To illustrate,  single taxpayer has AGI of $750,000 and $100,000 in itemized deductions. The difference between AGI and the threshold amount is $500,000, three percent of which equals $15,000. Taxpayer’s itemized deductions would be limited to $85,000.  No more than 80 percent of the taxpayer’s itemized deductions may be phased out.

            (5)    Reinstatement of Phase-Out on Personal Exemptions.       In a manner similar to that which determines the phaseout of itemized deductions, Congress has imposed the same “thresholds” for determining the phaseout of personal exemptions. For single taxpayers, the threshold is $250,000, and for joint filers, $300,000.  [The thresholds will be adjusted for inflation.]  Again, the difference between the taxpayer’s AGI and the threshold amount is the starting point for determining the phaseout.  The taxpayer will forfeit 2 percent of the allowable exemption for every $2,500 of that difference.  For example, assume the single taxpayer’s AGI is $250,000.  The phaseout will not apply.  However, if single taxpayer’s AGI is $450,000, the difference between AGI and the threshold amount is $200,000.  Personal exemptions are phased out to the extent of 2 percent of every incremental $2,500 “difference” between AGI and the threshold amount.  $200,000 divided by $2,500 equals 80.  Therefore, the taxpayer would lose all of his personal exemptions.  A difference between AGI and a threshold amount of $125,000 or more will extinguish all of the taxpayer’s personal exemptions (i.e., $2,500 x 50).  [Fifty increments of 2 percent equals 100 percent.]

                (i)    Note:   The $125,000 differential between the threshold amount and AGI is the same regardless of whether the taxpayer files singly, whether the taxpayer files jointly, or whether the taxpayer files separately.  The threshold amounts are higher for married filers.

            (6)    Payroll Tax Increases.     The employee portion of payroll tax has been increased by 2 percent on wages of up to $113,700.  This restores the rate of payroll tax to that which existed before the two year amnesty on this 2 percent amount. In addition, under the 2012 legislation, a new 0.9 percent Medicare tax will be imposed on wages and other compensation in excess of $250,000 for married filing jointly, and $200,000 for single, taxpayers.

            (7)    Alternative Minimum Tax Changes.     The Alternative Minimum Tax exemption amounts have been increased beginning in 2013, and are now indexed for inflation.  The exemption amounts for 2013 are increased to $50,600 for single taxpayers, $78,750 for taxpayers filing jointly, and $39,375 for married taxpayers filing jointly.

               (8)    Estate and Gift Tax. The feature of “portability” has become permanent.  Gift and estate taxes are again unified.  The lifetime exemption amount in 2013 is $5.25 million, which is indexed for inflation.  The rate of tax once the lifetime exemption has been exhausted (either during life or at death) has been increased from 35 percent to 40 percent.  The gift tax annual exclusion amount for 2013 is $14,000.  [Portability does not apply to the generation skipping transfer tax.]

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