American Taxpayer Relief Act of 2012 Part 1
January 28, 2013

On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act (Act). The Act extends and updates many individual and business tax provisions. Part one of this two part series focuses on individual tax changes contained in the Act.

Individual Tax Rates
Individual marginal tax rates stay the same (10%, 15%, 25%, 28%, 33% and 35%). However, a new top rate of 39.6% is in effect on taxable incomes over $400,000 (single filers), $425,000 (head-of-household filers), and $450,000 (married joint filers). These changes are effective for 2013 and beyond.

Capital Gains & Dividends
Long-term capital gains and qualified dividends will be taxed at 20% for those in the highest tax bracket (39.6%). Those in the middle brackets will be subject to the 15% rate. Taxpayers in the lowest two brackets (10% and 15%) will still enjoy a 0% rate. These changes are effective for 2013 and beyond.

Phase-out of Itemized Deductions and Personal Exemptions
Itemized deductions and personal exemptions will be limited for taxpayers that hit the adjusted gross income threshold amounts of: $250,000 for singles, $275,000 for heads-of-household, and $300,000 for married couples filing jointly. The overall limitation on itemized deductions does not apply to deductions for medical expenses, investment interest, casualty and theft losses, or gambling losses. These changes are effective for 2013 and beyond.

Alternative Minimum Tax (AMT)
For the 2012 tax year the exemption amounts are $78,750 (married filing joint) and $50,600 (single). Beyond 2012, the exemption amounts will be permanently indexed for inflation.

Individual Credits
The American opportunity tax credit for higher education expenses was extended through 2018. The enhanced provisions of the child tax credit and earned income credit were also extended through 2018.

Individual Provisions Extended
The Act also extended through 2013 many temporary individual tax provisions, most of which expired at the end of 2011:

  • Deduction for certain expenses of elementary and secondary school teachers
  • Exclusion from gross income of discharge of qualified principal residence indebtedness
  • Mortgage insurance premiums treated as qualified residence interest
  • Deduction of state and local general sales taxes
  • Deduction from gross income for tuition and related expenses
  • Special rule for contributions of capital gain real property made for conservation purposes
  • Tax-free distributions from individual retirement plans for charitable purposes
  • Credit for energy-efficient existing homes
  • Credit for two or three-wheeled plug-in electric vehicles