American Taxpayer Relief Act

January 3, 2013
By Kaye A. Thomas

In a last gasp effort Congress passed legislation to avert the fiscal cliff and prevent tax increases on 98% of Americans. Key features of the American Taxpayer Relief Act of 2012 (“ATRA”) include the following:

  • Existing income tax rates (including marriage penalty relief) are preserved for taxpayers with income up to $400,000 ($450,000 for couples filing jointly). A tax rate of 39.6% applies above that level.
  • Qualified dividends will continue to be taxed at capital gain rates, but a 20% rate will apply to both of these beginning at the income thresholds mentioned above.
  • The personal exemption phaseout and the Pease rule for reducing itemized deductions are revived, but at higher income levels than under prior law.
  • The law permanently fixes the alternative minimum tax (“AMT”), eliminating the recurring need for an “AMT patch.”
  • Seemingly out of nowhere, the law expands the availability of in-plan Roth conversions.
  • The estate tax provisions are more generous than might have been expected, retaining the $5 million exemption and raising the rate by only 5 percentage points, to 40%.

Most of the other provisions are pretty much what would have been expected. The law includes “extenders” for a wide range of provisions, from the itemized deduction for sales tax to the expanded student loan interest deduction. (Business extenders are included as well.) As anticipated, the law does not extend the 2 percentage point reduction in social security tax. The refundable AMT credit was also allowed to expire.

More about ATRA

We have many other articles dealing with various aspects of this law.

Tax rates

2013 income tax rate schedules
These are the income tax rates that apply for 2013, including changes made by ATRA as well as inflation adjustments.

ATRA Tax Rates
An explanation of some quirks in the tax rate schedules.

ATRA Tax Rates for Capital Gain and Dividends
Qualified dividends will continue to be taxed at capital gain rates. A new 20% rate applies to both at higher income levels, however.

Phaseouts

The Bush tax cuts temporarily repealed rules that phase out certain tax benefits at higher income levels. These rules come back into effect in 2013, but ATRA raises the income threshold where they begin to apply.

Pease Reduction in Itemized Deductions
This rule is often misunderstood. Although it works by reducing itemized deductions, its practical effect is usually the same as an increase in your tax rate by about one percentage point.

Personal Exemption Phaseout
Above certain levels of income, personal exemptions are reduced or eliminated.

Other provisions

ATRA Fix for Alternative Minimum Tax
At long last, AMT has been permanently indexed for inflation.

ATRA Expands Roth Conversions
ATRA makes the opportunity to convert a traditional account in a 401k or similar employer plan to a Roth account within the same plan more widely available.

Qualified Charitable Distribution Transition Rule
The rule allowing special treatment for certain payments from an IRA to a charity was extended for 2012 and 2013. A special form of retroactive relief was provided for 2012, but you had to act by January 31, 2013 to take advantage.

Tax Rules Extended by ATRA
Here’s a summary of what tax benefits were extended, and for how long.

Commentary

ATRA Tax Increase or Tax Cut?
For political reasons, both Democrats and Republicans have referred to this law as a tax increase. In budgetary terms, however, it’s a tax cut — and a huge one.

CCH Gets Political?
A remark included in a summary provided by this usually studiously neutral research service sounded like a political talking point.