In a major development affecting all employers and most taxpayers, the House of Representatives on January 1, 2013 approved the American Taxpayer Relief Act of 2012 ("the Act"), H.R. 8, Pub. L. No. 112-240, 126 Stat. 2313, passed by the Senate earlier in the day. The President signed the Act on January 3, 2013. The Act made permanent the "Bush era" tax cuts for most Americans. Although the tax cuts technically expired just after midnight on December 31, 2012, the legislation was made retroactive. Significantly, the legislation did not extend the 2% reduction in the employee portion of the Social Security tax that had been in place for the past two years under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and subsequent legislation.
The Act permanently extended the Bush‑era tax rates for all incomes up to $400,000 for individuals and $450,000 for joint filers. The tax rates that applied to incomes above those levels expired. Specifically, the top rate rose from 35% to 39.6%. The legislation also permanently adjusted the income exemption levels for the Alternative Minimum Tax for inflation. On January 3, 2013, the IRS published revised 2013 percentage‑method withholding tables in IRS Notice 1036, Early Release Copies of the 2013 Percentage Method Tables for Income Tax Withholding, www.irs.gov/pub/irs‑pdf/n1036.pdf.
Effective for wages paid on and after January 1, 2013, employers must also withhold Social Security tax at a rate of 6.2% from all wages up to $113,700. As noted above, this represents a 2% increase from the 2011 and 2012 tax rate, which was 4.2%.
The Act also makes permanent the tax credit for employer‑provided child-care facilities and services. Furthermore, it extends permanently the adoption credit and the income exclusion for employer-paid or reimbursed adoption expenses up to $10,000 (indexed for inflation) both for non-special needs adoptions and special needs adoptions. Additionally, the Act extends permanently the exclusion from income and employment taxes of employer‑provided education assistance of up to $5,250. The employer may also deduct up to that amount annually for qualified education expenses paid on an employee's behalf.
The increase for the exclusion for employer‑provided transit and carpool benefits was also extended permanently. The exclusion had been increased to $240 a month through 2012 but had been scheduled to fall back to $125 at the beginning of 2013.
For businesses, the legislation extended for two years several tax breaks, including a production tax credit for developers of wind projects, the research and development tax credit, and a measure allowing for bonus depreciation. The Work Opportunity Tax Credit, which rewards employers for hiring individuals from certain disadvantaged groups (such as unemployed veterans), was revived and extended through 2013. The employer wage credit for activated military reservists was also revived and extended through the same time period.
The Act extended for one more year the federally funded unemployment compensation benefits available to unemployed workers who have exhausted their initial period of state benefits (typically 26 weeks). Without the extension, it was estimated that more than two million of the long‑term unemployed would have run out of benefits.
Since June 2008, a series of federal legislative measures have extended the period for such benefits. These measures included the American Recovery and Reinvestment Act of 2009 and, most recently, the Extended Benefits, Reemployment, and Program Integrity Improvement Act of 2012.
The Act also contains a number of provisions of interest to individual taxpayers. To the extent that taxable income exceeds the threshold amounts for the 39.6% tax rate, long-term capital gains and qualified dividends are subject to a 20% rate, an increase from the Bush-era maximum rate of 15%. Capital gains and qualified dividends that would be subject to the 25% or 35% rates if they were ordinary income continue to be subject to the 15% capital gains rate. A 0% rate continues to apply to capital gains and qualified dividends that would be taxed at the 15% rate if they were ordinary income. (For 2013, ordinary income below $72,500 for joint filers and $36,250 for single filers will be taxed at the 15% rate.)
The Act also reinstated the limitation that reduces itemized deductions for taxpayers who meet certain thresholds by 3% of the amount by which the taxpayer's AGI exceeds the thresholds. The threshold amount is $250,000 for single taxpayers and $300,000 for married taxpayers filing joint returns. These thresholds are subject to adjustment for inflation for tax years after 2013. Under this limitation, the amount of itemized deductions cannot be reduced by more than 80%. The personal exemption phaseout was also revived by the Act.
Concerning estate and gift taxation, for 2013 the maximum estate tax rate was scheduled to revert to 55%, and the exclusion amount was scheduled to be reduced from $5 million to $1 million. The Act provides for a maximum rate of 40% and a lifetime exemption amount of $5 million, subject to adjustment for inflation for taxpayers dying after December. 31, 2012. For 2013, the inflation-adjusted amount is $5.25 million. In addition, the Act unifies the estate, gift, and generation-skipping tax, creating a single rate of 40% and a single exemption amount of $5 million.