The last minute ‘fiscal cliff’ deal and what it means for US taxpayers
As most of you are probably aware, Congress and President Obama averted the country going over a ‘Fiscal Cliff’ at the very last minute by passing and signing the American Taxpayer Relief Act (“ATRA”) of 2012.
Two of our in house lawyers, Andrew Aldridge and Bradley Albin have outlined it below.
From an individual tax perspective, ATRA provided the following:
- Income Tax :
- The Current Income Tax rates (maximum 35%) and capital gains/dividend rates (15%) remain the same for individuals with taxable income below $400,000 ($450,000 married taxpayers and “head of household”). New rates for those above these thresholds are 39.6% and 20% respectively.
- Caution—ATRA did not alter the new 3.8% tax (Obamacare) on Net Investment Income (if income exceeds $200,000 for single taxpayers and $250,000 for joint returns). Please note: under certain circumstances the tax on capital gains for high earners (over $400,000 single and $450,000 married) could be 23.8% for long-term gains and 43.4% for short term capital gains.
- Marriage Penalty Relief extended.
- AMT patch is now permanent and will be adjusted for inflation.
- Itemized deductions and personal exemptions for incomes above $300,000 (married), $275,000 (Head of Household), $250,000 (single) and $150,000 (married filing separately) will be phased out.
- Estate/Gift Tax:
- Life-time exemption $5,000,000 (no charge to top overall amount) will be adjusted for inflation, however the top rate is now 40% (previous 35%).
- Exemption amount remains ‘portable’ between spouses.
From a business tax perspective, the ATRA provided for several business tax extenders including:
- An extension on the Section 41 research credit for research activities paid or incurred on or before December 31, 2013.
- An extension of the Section 45D new markets credit of $3.5 billion set for 2010 and 2011 to be used for 2012 and 2013 (with unused credits to be carried over until 2018).
- An extension of the Work Opportunity Credit for all individuals who began work for the employer on or before December 31, 2013.
- An extension of the special 15 year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements for all qualified property placed in service before 2014.
- A provision of a $500,000 maximum cost of Section 179 property that may be expensed rather than depreciated in tax years beginning 2012 and 2013 with a phase out threshold of $2,000,000 (after 2013, the amounts would be $25,000 and $200,000 respectively).
- An extension of the special rule for applying Section 179 to certain real property by allowing such real property to be Section 179 property through 2013.
- An extension of the Section 168(k) 50 percent bonus depreciation provision to property acquired and placed in service before January 1, 2014 and an extension for one additional year (for tax years beginning in 2013) to the provision allowing corporate taxpayers to elect to accelerate the AMT and research credits in lieu of bonus depreciation.
- An extension of the exemption from the 30 percent withholding tax under Section 871 for qualified interest-related dividends paid and short-term capital gain dividends received from a foreign person from a RIC through December 31, 2013.
- An extension of the exception from current inclusion under the sub-part F rules for certain income derived in the active conduct of a banking, financing or similar business, in the conduct of an insurance business, or as a securities dealer for tax years of foreign corporation beginning before 2014 and for tax years of their US shareholders with or within such year.
- An extension of the exception under Section 954(c)(6) from current inclusion as foreign personal holding income for dividends, interest, rents, and royalties received by a controlled foreign corporation (CFC) from a related CFC to the extent such amount was neither subpart F income nor effectively connected income for tax years of foreign corporations before 2014 and for tax years of their US shareholders with or within such year.
- An extension of the 100 percent exclusion of the gain from the sale of qualifying small business stock for such stock that is acquired before January 1, 2014 and held for more than five years.
- An extension of the reduction in the S-Corporation recognition period for built-in gains tax (5 year recognition period) for tax years 2012 and 2013.