As of Jan. 2, 2013, the tax portion of the infamous “fiscal cliff” was averted when the American Taxpayer Relief Act was approved, making permanent the Bush-era tax rates for individuals and families with incomes up to $400,000, reinstating Alternative Minimum Tax (AMT) rates, and extending various business incentives, including Section 179 deduction limits and credits such as the research and development and work opportunity incentives. Read more about the changes and their impact on individuals and businesses below:

Individual Income Tax Rates

The Bush-era tax cuts generally remain, with the exception of taxpayers with incomes exceeding $400,000; married couples with a combined income of more than $450,000; and heads of household with incomes more than $425,000. For 2013 and beyond, the 10, 15, 20, 33 and 35 percent marginal tax rates remain, except for those qualifying groups with incomes exceeding $400,000, which will fall under a new 39.6 percent bracket. The following table includes income ranges matching each marginal rate percentage:

2013 Individual Tax Rates

These rates have a significant impact on businesses. With the majority of businesses in the United States structured as partnerships or S corporations, profits pass through individual owners, resulting in taxation at the individual income rates. In light of the higher rates, a C corporation may now appear more attractive to some owners, as it falls under the 35 percent tax rate.

Capital Gains and Dividends

The top rate for capital gains and dividends will increase by 5 percent, now standing at 20 percent. The Bush-era tax cuts held the top rate at 15 percent. This applies to the highest taxpayer individual income threshold. The zero percent rate is still applicable to income below the top of the 15 percent tax rate bracket.

Business Tax Breaks

Code Section 179 Expensing Extension

As a result of the American Taxpayer Relief Act, the code Section 179 expensing is extended through 2013 with a few enhancements. The dollar limit for the 2012 and 2013 tax years is $500,000, with a $2 million investment limit. Without the approved act, dollar limits would have been $125,000, with a $500,000 investment limit for 2012, and $25,000 and $200,000 respectively for tax years after 2012.

Several previous acts, including the Tax Relief Act of 2010 and Jobs Act of 2010, affected Section 179 in a positive way that will be extended through the 2012 tax year for qualifying new and used equipment and property in place on or before Dec. 31, 2012. These include:

  • 2012 deduction limit at $139,000. Deduction limits after adjustments for inflation increased to $139,000. Prior to the American Tax Relief Act, the allowance would have been $25,000.
  • 2012 limit on capital purchases at $560,000. The threshold for total equipment and software that can be purchased increases to $560,000. Prior to the American Tax Relief Act, the threshold would have been $200,000.
  • 2012 bonus depreciation set at 50 percent. The new law allows for a 50 percent bonus depreciation through 2013 on qualified assets placed in service during 2012. A bonus depreciation of 50 percent is available through 2014 for some transportation and longer-period production property. Bonus depreciation was originally set at 100 percent, but has been reduced to 50 percent.

Eligible property includes property depreciable as part of the Modified Acceleration Cost Recovery System (MACRS) and property that has a recovery period of 20 years or less.

Research and Development Tax Credit

Originally expiring after 2011, this bipartisan-favored credit and is revived for taxpayers engaging in qualified research activities. These taxpayers are rewarded an actual dollar-for-dollar credit against taxes owed or taxes paid. This tax credit impacts a wide range of industries, including aerospace, engineering, manufacturing and food processing. The credit applies to companies that conduct research more than the average they have conducted over the past four years.

Work Opportunity Tax Credit (WOTC)

WOTC is now extended through 2013 for employers who hire unemployed and disabled veterans, as well as “hard-to-employ” target groups, such as:

  • Ex-felons
  • Supplemental Nutrition Assistance Program (SNAP) recipients
  • Aid to Families with Dependent Children (AFDC) recipients
  • Temporary Assistance for Needy Families (TANF) recipients
  • SSI recipients

Employers hiring individuals from such groups are eligible for a tax credit up to 40 percent of first-year wages up to $6,000. For veterans, WOTC can be as much as follows:

  • $2,400 for veterans receiving SNAP
  • $2,400 for veterans employed at least four weeks
  • $4,800 for disabled veterans released a one year after active duty
  • $5,600 for each new disabled veteran unemployed at least six months
  • $9,600 for disabled veterans unemployed for at least six months

Alternative Minimum Tax

Although talks of revisions and total abolition persist, the AMT pushes forward to permanence under the American Taxpayer Relief Act. The AMT comes with exemption amount increases, however, for 2012 and subsequent years. The act increases the 2012 exemption amounts to:

  • $50,600 for unmarried individuals (from $33,750)
  • $78,750 for married taxpayers filing jointly (from ($45,000)
  • $39,375 for taxpayers filing separately (from $40,375)

As a result, more than 60 million taxpayers are relieved from being subject to an AMT on tax returns being filed for 2012. For tax years 2011 and beyond, the American Taxpayer Relief Act provides that all nonrefundable personal credits are allotted to the complete extent of the taxpayer’s normal AMT liability.

The longevity of the AMT still looms if Congress decides to move forward with a comprehensive tax reform later this year. President Barack Obama has proposed replacing AMT with the “Buffet Rule” in the event AMT is eliminated by Congress. This proposed rule would ensure taxpayers with annual income exceeding $1,000,000 would pay a tax rate of at least 30 percent.

Estate and Gift Taxes

The American Taxpayer Relief Act offers a permanent maximum federal estate tax rate of 40 percent with an annually inflation-adjusted $5 million exclusion for estates of decadents dying after Dec. 31, 2012. The maximum rates for those dying after Dec. 31, 2010, and before Jan. 1, 2013, are 35 percent with a $5 million exemption.

The gift tax also provides a 40 percent tax rate, but for gifts made after 2012, the gift tax exemption will be at $5 million.

Additional Tax Updates

Several additional tax revisions and extensions took place as result of the American Taxpayer Relief Act, including:

  • A number of Generation Skipping Transfer (GST) taxes that were set to expire in 2012 have been extended
  • $1,000 child tax credit is permanently extended
  • American Opportunity Tax Credit is extended through 2017
  • $250 deduction for elementary and secondary school teachers has been extended through 2013
  • An additional 0.9 percent Medicare tax will be applied to wages exceeding $200,000

With the American Taxpayer Relief Act in effect, it is imperative to be aware of the various tax changes and how they impact you and your business. To learn more about the act and how to best prepare, contact our dedicated Tax and Tax Incentives groups, with CPAs in Troy, Mich. or Houston, Texas.