LITTLE DISCUSSED PROVISIONS OF THE AMERICAN TAX PAYER RELIEF ACT OF 2012

by Eric N. Allen January 2013

The projected "Fiscal Cliff" has been the subject of much discussion and media attention since the 2012 election. That even, which was set to take place on January 1, 2013, was a crisis created by Congress in 2010 when it was unable to reach an agreement to make permanent changes in the Tax Code to address annual trillion dollar deficits. The Fiscal Cliff, whether real or contrived, was at least temporarily averted early in the morning of January 1, 2013, when the House of Representatives reached an agreement to pass a bill that President Obama indicated that he would be willing to accept.

Much of the attention in the media has dealt with the retention of the 2001 income tax rates for the majority of taxpayers. That topic is being addressed in a separate article. This article highlights some of the lesser-known features of the law involving either changes to the Tax Code or retention of existing provisions.

1. Estate Tax. The federal estate tax remains a non-factor for the vast majority of people with the 2012 exemption amount of $5.12 million per person being expanded indefinitely into the future. This means that with proper planning, a married couple can protect over $10 million from taxation. The only change was that for those persons subject to the tax, the maximum tax rate increased from 35% to 40%.

2. Social Security Tax. The new law did not extend the payroll tax "holiday" enacted in 2010, which reduced the social security (FICA) withholding tax by 2% to 4.2%. The old rate of 6.2% has been restored, effective January 1, 2013, and will result in lowered net income in paychecks, regardless of the taxpayer's income level. This will have a significant impact on taxpayers: this increase alone will amount to a $1,000 annual increase on a wage earner whose annual gross income is $50,000.

3. Medicare Tax. The new law increases the Medicare tax by an additional 0.9% (from 1.45% to 2.35%) on the amount of income an individual earns above $200,000, or that a married couple (filing jointly) earns above $250,000. For a married couple filing separately, the Medicare tax increase kicks in for earned income of each spouse above $125,000.

4. Child Tax Credit. The increase in the Child Tax Credit (from $500 to $1,000) in the Bush tax cuts has been extended to 2013.

5. Alternative Minimum Tax. Revisions previously made by Congress on the Alternative Minimum Tax in order to make the tax more fair have been permanently extended and indexed for inflation.

6. Energy Credits. Various existing energy credits and energy tax provisions were extended.

7. School Teachers. Existing deductions for certain expenses incurred by elementary and secondary school teachers were extended.

8. Mortgage Insurance Premiums. Existing rules allowing taxpayers to deduct mortgage insurance premiums in the same manner as mortgage interest were extended.

9. State and Local Sales Taxes. Existing provisions giving taxpayers the option to deduct either state income tax or state sales taxes on their federal returns were extended.

10. Tuition Expenses. Certain qualified tuition expenses under the rules relating to the ability to deduct certain qualified tuition expenses were extended.

11. IRA Transfers to Charity. The existing rules that allowed taxpayers who were 70½ years old or older the ability to transfer up to $100,000 a year directly from an IRA to a charity without having to include any of that transfer in their gross income was extended.

12. Business Tax Extenders. Various existing business tax credits, allowances, deductions and depreciation rules were extended.

13. Unemployment. The Emergency Unemployment Compensation Program was extended until January 1, 2014.

The number of taxes, credits, etc., affected by the new law have necessitated this short summary. Our attorneys would be happy to review and discuss with you any of these or other parts of the law that you feel may impact your personal or business situations.