T he “fiscal cliff” legislation enacted on Jan. 2—the American Taxpayer Relief Act , P.L. 112-240—contains a large number of tax provisions. With some modifications, the act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (EGTRRA), and Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (JGTRRA). It also permanently takes care of Congress’s perennial job of “patching” the alternative minimum tax (AMT). It temporarily extends many other tax provisions that had lapsed at midnight on Dec. 31 and others that had expired a year earlier.
Individual tax rates: All the individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).
Phaseout of itemized deductions and personal exemptions: The personal exemptions and itemized deductions phaseout is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.
Capital gains and dividends: A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.
Alternative minimum tax: The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Relief from AMT for nonrefundable credits is retained.
Estate and gift tax: The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.25 million in 2013), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act.
Income tax rates for trusts and estates: The act amends the table under Sec. 1(e) to provide rates of 15%, 25%, 28%, 33%, and 39.6% for trusts and estates. Unlike for individuals, there is no 35% rate for trust and estate income.
Roth rules: The act changes the rules governing in-plan rollovers from Sec. 401(k), 403(b), or 457(b) plans to a Roth 401(k) plan, allowing these rollovers to be made without a distribution. Under the new rules, if a plan includes a qualified Roth contribution program, participants can transfer any amount not otherwise distributable under the plan to a designated Roth account, and the distribution will be treated as a qualified rollover contribution.
Various temporary tax provisions enacted as part of EGTRRA were made permanent. These include:
- Marriage penalty relief (i.e., the increased size of the 15% rate bracket (Sec. 1(f)(8)) and increased standard deduction for married taxpayers filing jointly (Sec. 63(c)(2));
- The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one) (Sec. 21);
- Expanded adoption credit (Sec. 23) and adoption-assistance program (Sec. 137) amounts;
- The exclusion for National Health Service Corps and Armed Forces Health Professions scholarships (Sec. 117(c)(2));
- The exclusion for employer-provided educational assistance (Sec. 127);
- The enhanced rules for student loan deductions introduced by EGTRRA (Sec. 221);
- The higher contribution amount and other EGTRRA changes to Coverdell education savings accounts (Sec. 530);
- The employer-provided child care credit (Sec. 45F);
- Special treatment of tax-exempt bonds for education facilities (Sec 142(a)(13));
- Repeal of the collapsible corporation rules (Sec. 341);
- Special rates for accumulated earnings tax and personal holding company tax (Secs. 531 and 541); and
- Modified tax treatment for electing Alaska Native Settlement Trusts (Sec. 646).
Expired Individual Credits
The American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2017. Other credits and items from the American Recovery and Reinvestment Act of 2009, P.L. 111-5, that were extended for the same five-year period include enhanced provisions of the child tax credit under Sec. 24(d) and the earned income tax credit under Sec. 32(b). In addition, the bill permanently extends a rule excluding from taxable income refunds from certain federal and federally assisted programs (Sec. 6409).
Expired Individual Provisions
The act also extended through 2013 a number of temporary individual tax provisions, most of which expired at the end of 2011:
- Deduction for certain expenses of elementary and secondary school teachers (Sec. 62);
- Exclusion from gross income of discharge of qualified principal residence indebtedness (Sec. 108);
- Parity for exclusion from income for employer-provided mass transit and parking benefits (Sec. 132(f));
- Mortgage insurance premiums treated as qualified residence interest (Sec. 163(h));
- Deduction of state and local general sales taxes (Sec. 164(b));
- Special rule for contributions of capital gain real property made for conservation purposes (Sec. 170(b));
- Above-the-line deduction for qualified tuition and related expenses (Sec. 222); and
- Tax-free distributions from individual retirement plans for charitable purposes (Sec. 408(d)).
Business Tax Extenders
The act also extended many business tax credits and other provisions. Notably, it extended through 2013 and modified the Sec. 41 credit for increasing research and development activities, which expired at the end of 2011. One modification to the credit is to allow partial inclusion in qualified research expenses and gross receipts those of an acquired trade or business or major portion of one.
The increased expensing amounts under Sec. 179 are extended through 2013 ($500,000 limit; $2 million investment limit). The availability of an additional 50% first-year bonus depreciation (Sec. 168(k)) was also extended for one year by the act. It now generally applies to property placed in service before Jan. 1, 2014 (Jan. 1, 2015, for certain property with longer production periods).
Other business provisions extended through 2013, and in some cases modified, are:
- Temporary minimum low-income tax credit rate for non–federally subsidized new buildings (Sec. 42);
- Housing allowance exclusion for determining area median gross income for qualified residential rental project exempt facility bonds (Section 3005 of the Housing Assistance Tax Act of 2008);
- Indian employment tax credit (Sec. 45A);
- New markets tax credit (Sec. 45D);
- Railroad track maintenance credit (Sec. 45G);
- Mine rescue team training credit (Sec. 45N);
- Employer wage credit for employees who are active duty members of the uniformed services (Sec. 45P);
- Work opportunity tax credit (Sec. 51);
- Qualified zone academy bonds (Sec. 54E);
- Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (Sec. 168(e));
- Accelerated depreciation for business property on an Indian reservation (Sec. 168(j));
- Enhanced charitable deduction for contributions of food inventory (Sec. 170(e));
- Election to expense mine safety equipment (Sec. 179E);
- Special expensing rules for certain film and television productions (Sec. 181);
- Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico (Sec. 199(d));
- Modification of tax treatment of certain payments to controlling exempt organizations (Sec. 512(b));
- Treatment of certain dividends of regulated investment companies (Sec. 871(k));
- Regulated investment company qualified investment entity treatment under the Foreign Investment in Real Property Tax Act (Sec. 897(h));
- Extension of subpart F exception for active financing income (Sec. 953(e));
- Lookthrough treatment of payments between related controlled foreign corporations under foreign personal holding company rules (Sec. 954);
- Temporary exclusion of 100% of gain on certain small business stock (Sec. 1202);
- Basis adjustment to stock of S corporations making charitable contributions of property (Sec. 1367);
- Reduction in S corporation recognition period for built-in gains tax (Sec. 1374(d));
- Empowerment zone tax incentives (Sec. 1391);
- Tax-exempt financing for New York Liberty Zone (Sec. 1400L);
- Temporary increase in limit on cover-over of rum excise taxes to Puerto Rico and the Virgin Islands (Sec. 7652(f)); and
- American Samoa economic development credit (Section 119 of the Tax Relief and Health Care Act of 2006, P.L. 109-432, as modified).
Energy Tax Extenders
The act also extends through 2013, and in some cases modifies, a number of energy credits and provisions that expired at the end of 2011:
- Credit for energy-efficient existing homes (Sec. 25C);
- Credit for alternative fuel vehicle refueling property (Sec. 30C);
- Credit for two- or three-wheeled plug-in electric vehicles (Sec. 30D);
- Cellulosic biofuel producer credit (Sec. 40(b), as modified);
- Incentives for biodiesel and renewable diesel (Sec. 40A);
- Production credit for Indian coal facilities placed in service before 2009 (Sec. 45(e)) (extended to an eight-year period);
- Credits with respect to facilities producing energy from certain renewable resources (Sec. 45(d), as modified);
- Credit for energy-efficient new homes (Sec. 45L);
- Credit for energy-efficient appliances (Sec. 45M);
- Special allowance for cellulosic biofuel plant property (Sec. 168(l), as modified);
- Special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy for qualified electric utilities (Sec. 451); and
- Alternative fuels excise tax credits (Sec. 6426).
The IRS’s authority under Sec. 1445(e)(1) to apply a withholding tax to gains on the disposition of U.S. real property interests by partnerships, trusts, or estates that are passed through to partners or beneficiaries that are foreign persons is made permanent, and the amount is increased to 20%.