Understanding the American Taxpayer Relief Act

Jim A. Forbes, CPA, Principal, Skoda Minotti

Jim A. Forbes, CPA, Principal, Skoda Minotti

When President Obama signed the American Taxpayer Relief Act (ATRA) into law in January, the much-feared “fiscal cliff” was avoided, for the most part.

Smart Business spoke with Jim A. Forbes, CPA, a principal with Skoda Minotti’s Tax Planning & Preparation Group, about five key elements of the act affecting both individual taxpayers and businesses.

What item most benefits individuals?

Signage of the act provides permanent relief from the Alternative Minimum Tax (AMT). If the AMT ‘patch’ had not been put in place, as many as 30 million taxpayers could have been affected. Fortunately, a permanent AMT patch has been put in place.

Retroactively, effective for tax years beginning after 2011, the AMT exemption amounts (and indexes for inflation) have been permanently increased to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. This means that, for a single person, the first $50,600 of income is exempt from the AMT calculation.

Do any items have a negative effect on individual taxpayers?

Overall, passage of the act positively impacts most individual taxpayers. The return of the phase-out of itemized deductions and personal exemptions, though, could have a negative impact.

The Personal Exemption Phase-out (PEP) is reinstated with a starting threshold for those making $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married taxpayers filing separately. For 2013, you’ll be able to deduct $3,900 for yourself, your spouse and your dependents. However, if you are over these thresholds, the value of each personal exemption is reduced by 2 percent for each $2,500 above the specified income thresholds. So a married couple making $400,000 would see a $2,000 cut in their personal exemptions.

Also, the ‘Pease’ limitation on itemized deductions was reinstated, with starting thresholds that are the same as for the PEP. For taxpayers subject to the ‘Pease’ limitation, the total amount of their itemized deductions is reduced by 3 percent of the amount by which the taxpayer’s adjusted gross income (AGI) exceeds the threshold amount, with the reduction not to exceed 80 percent of the otherwise allowable itemized deductions. For example, a married couple with income of $400,000 filing their tax return with $50,000 of itemized deductions would see about a $3,000 reduction in their itemized deductions, resulting in about $1,000 more in tax.

How are higher income individuals affected?

The regular tax rate and dividend/capital gains tax rate both increased for higher income individuals. The income tax rates for individuals will stay at 10, 15, 25, 28, 33 and 35 percent, but now a 39.6 percent rate applies for income above $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married taxpayers filing separately. The top rate for capital gains and dividends permanently rises to 20 percent for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). When combined with the new 3.8 percent Medicare surtax on investment income, the overall rate for higher income taxpayers will be 23.8 percent.

What are some of the ways that businesses are affected?

Two that are applicable to most businesses are the extension of bonus depreciation and the increase in Section 179 deduction.

The act retroactively extended 50 percent bonus depreciation for property placed in service before Jan. 1, 2014. And some transportation and longer period production property is eligible for 50 percent bonus depreciation through 2014. In other words, businesses can deduct 50 percent of the cost of the property while deducting the remainder of the cost of the property over its useful life. Plus, bonus depreciation can be used to create a loss. The Section 179 deduction can now be taken on new or used property up to $500,000, allowing businesses to fully deduct the cost of the property in the year it acquires it instead of deducting a portion of cost over its useful life. Previously, the deduction could only be applied to new or used property up to $139,000.

Jim A. Forbes, CPA, is a principal at Skoda Minotti. Reach him at (440) 449-6800 or [email protected]

Contact: Have questions on how the American Taxpayer Relief Act affects you or your business? Contact our Tax Planning & Preparation Group at (440) 449-6800.

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