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Tackling the American Taxpayer Relief Act of 2012 In 5 Easy Steps

What is the American Taxpayer Relief Act of 2012?

This act is a partial resolution to the United States fiscal cliff by addressing the expiration of certain tax provisions centered around what are called the Bush-era tax cuts. This act tackles the tax revenue side of a Congressional deficit reduction plan, was passed by the United States Congress on January 1, 2013, and was signed into law by President Barack Obama on January 2, 2013.

  1.   Understand the IMPACT of income tax law changes. Roughly 98% of Americans will not be impacted by changes to the income tax brackets. However, individuals who file as single and make over $400,000/year or married filing jointly that make over $450,000/year will pay a 39.6% income tax rate.
  2.   Plan with HIGHER taxes in mind. The overall limitation on itemized deductions is back for those making $250,000 (single) and $300,000 (married filing jointly); personal exemptions will be reduced at the same limits; the payroll tax holiday expired with Social Security taxes going back to 6.2% from 4.2%; and the 3.8% healthcare surtax kicks in this year on net investment income of over $200,000 (single) and $250,000 (married filing jointly) along with a 0.9% surtax on wages at the same limits.
  3.   Be aware of these other KEY tax law changes. The $5 million estate/gift/GST tax exemption (will be indexed for inflation) and portability for the estate and gift tax exemptions are PERMANENT features of the law, and the top estate tax rate has climbed from 35% to 40%. Capital gains rates are the same EXCEPT for individuals in the highest income tax bracket, who will pay a 20% tax rate. A permanent AMT patch indexed for inflation was also instituted. The 2012 AMT exemption is $78,750 (married filing jointly) and $50,600 (single).
  4.   Utliize new provision for in-plan Roth conversions. You no longer have to be eligible for a distribution from your employer plan to go through with a Roth conversion as long as the plan has a Roth option (i.e. 401(k) to Roth 401(k)). Key points to consider: 1) In-plan Roth conversions CANNOT be recharacterized; 2) You must make sure you have the money to pay tax on the conversion; 3) Roth employer plans HAVE required minimum distributions (RMDs); You can utilize this provision for longer TAX-FREE growth in a Roth plan.
  5.   Celebrate the return of Qualified Charitable Distributions (QCDs)! QCDs are back retroactively through 2012 and extended through 2013. This will expire at the END of 2013. QCDs allow taxpayers required to take annual distributions from their IRAs to direct those withdrawals to charitable organizations and treat them as tax-free distributions.

Special rules also apply in January 2013 to make 2012 QCDs.

Click below to access a PDF of this Blog:

TaxPayerReliefAct2012