The Taxpayer Relief Act of 2012
On January 1st, under intense pressure to avert the so-called "fiscal cliff", the House of Representatives passed the American Taxpayer Relief Act of 2012. While the entire 157-page bill (H.R. 8) is beyond the scope of this article, there are several key provisions that may be of particular interest to your 2013 (and beyond) tax and financial planning concerns.
While it's true that the Act creates a new, 39.6% federal marginal tax bracket for single taxpayers with taxable income over $400,000 and married filing jointly taxpayers with taxable income over $450,000, the fact remains that federal marginal income tax rates will remain exactly the same for nearly 98% of the taxpaying public. Nearly all taxpayers will see an immediate increase in their payroll taxes however, because the 2% payroll tax "holiday" on Social Security tax withholding expired with passage of the Act. Other taxpayers will see their federal taxes rise when they file for 2013 (in 2014) because the "phase-out" on itemized deductions (i.e. state income taxes, mortgage interest, real estate taxes, charitable donations, etc.) has been reinstated for single taxpayers with income over $250,000 and married filing jointly taxpayers with income over $300,000. The good news (is there ever good news out of Washington?) however is that the majority of American taxpayers will see little or no increase in their federal tax burden as a result of the new Act.
Other provisions having to do with estate taxation will also greatly simplify planning for those with potentially taxable estates. The Act has made permanent the $5,000,000 personal exemption (nearly $5.2 million this year when indexed for inflation) from estate taxes, as well as the "portability" feature, which allows surviving spouses to use the decedent's remaining exemption amount without the need for a credit shelter trust. The bad news (that's more like it, Washington!) is that the top estate tax rate will increase to 40% from 35%, but this, too, will only affect those taxpayers with taxable estates in excess of $10,000,000 (a nice problem to have, to be sure).
On the issue of capital gains, the Act made permanent the current rate of 15% on long-term gains for most taxpayers, increasing to 20% only for those in the 39.6% federal marginal tax bracket. Even at 20% however, this is still half the rate on short-term gains and ordinary income. Also made permanent is an indexing for inflation of the AMT (alternative minimum tax) - something that until passage of this Act had only been addressed, willy-nilly, with a "patch" each year (albeit, very near the filing deadline each year).
The last (for the purposes of this brief article) item that may be of interest to some of you is a provision that allows retirement plan participants in 401k, 403b, and 457 plans with a Roth feature to make an "in-plan" conversion of their "ordinary" (pre-tax) plan assets to a Roth 401k, 403b, or 457 without having to be eligible for a plan distribution (for instance, upon retirement or after separation from service). This will make doing partial Roth conversions each year easier for those whose plans adopt the provision.
So there you have it! Not too bad, on balance: Most taxpayers will see little or no increase in their federal taxes, others will find aspects of the Act that make their long-term tax and financial planning challenges easier, and everyone will benefit from the clarity and certainty that comes with the provisions made permanent under the Act.
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