The American Taxpayer Relief Act of 2012 (H.R. 8, also referred
to as the “2012 Taxpayer Relief Act”)
The 2012 Taxpayer Relief Act was passed by Congress on Jan. 1,
2013, and signed into law by President Obama on Jan. 2, 2013. It will prevent
many of the tax hikes that were scheduled to go into effect this year and
retain many favorable tax breaks that were scheduled to expire, but will also
increase income taxes for some high-income individuals and slightly increase
transfer tax rates from 2012 levels. Further, it extends a host of expired and
expiring tax breaks for businesses and individuals, and adds a number of new
provisions as well.
To compute regular tax liability, an
individual uses the appropriate tax rate schedule (or IRS-issued income tax
tables for taxable income of less than $100,000). The Code provides four
(statutory) tax rate schedules based on filing status, i.e., single, married
filing jointly/surviving spouse, married filing separately, and head of
household. Each schedule is divided into income ranges (“tax brackets”), which
are taxed at progressively higher marginal tax rates as income increases. The
same marginal tax rates apply to all individual taxpayers, but the bracket
amounts (income ranges) to which the rates apply differ based on the taxpayer's
filing status.
The statutory rate schedules are divided into
five tax brackets—15%, 28%, 31%, 36%, and 39.6%. But, as described below, other
Code provisions modify these statutory rate schedules. Each year IRS adjusts
the bracket amounts for each rate schedule for inflation (with certain
exceptions, for inflation since 1992), and IRS's inflation-adjusted rate
schedules are the ones used to compute tax (not the statutory rate schedules).
EGTRRA/JGTRRA/WFTRA
changes. Under the Economic
Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA,” Sec.
101, PL 107-16, 6/7/2001 ), the Jobs and Growth Tax Relief Reconciliation Act of 2003
(“JGTRRA,” Sec.
104, PL 108-27, 5/28/2003 , and Sec.
105, PL 108-27, 5/28/2003 ), and the Working Families Tax Relief Act of
2004 (“WFTRA,” Sec.
101, PL 108-311, 10/4/2004 ), the statutory rate schedules were modified
to:
·
add a new 10% tax
bracket for individuals carved out of the existing 15% tax bracket (resulting
in six tax brackets for individuals instead of five);
·
phase-in a reduction
of the top four marginal tax rates to 25%, 28%, 33%, and 35%; and
·
provide a special
inflation adjustment for the 10% bracket (computing inflation since 2002).
IRS also was required to adjust its income tax
tables (which are based on the rate schedules) to reflect these EGTRRA changes. FTC 2d/Fin ¶A-1100; FTC 2d/Fin ¶A-1101; FTC 2d/Fin ¶A-1102; FTC 2d/Fin ¶A-1103; FTC 2d/Fin ¶A-1104; FTC 2d/Fin ¶A-1113; USTR
¶14; USTR
¶14.08. Under
Sec. 901 of title IX of EGTRRA (Sec. 901, PL 107-16,
6/7/2001 ),
to which the applicable JGTRRA (Sec. 107, PL 108-27,
5/28/2003 )
and WFTRA provisions (Sec. 105, PL 108-311,
10/4/2004 )
were made subject, all of the EGTRRA/JGTRRA/WFTRA changes described above were
scheduled to expire (sunset) for tax years beginning after Dec. 31, 2010, and
the tax rates in effect before the passage of EGTRRA were scheduled to come
back into effect, i.e., individuals' taxable income was to be subject again to
five tax brackets, taxed at 15%, 28%, 31%, 36%, and 39.6% marginal tax rates.
But Sec. 101(a) of the 2010 Tax Relief Act (Sec. 101(a), PL 111-312,
12/17/2010 )
modified this EGTRRA sunset provision to make it first apply after Dec. 31,
2012 (instead of after Dec. 31, 2010), i.e., the 10% tax bracket and related
special inflation adjustment rules, and the reduced 25%, 28%, 33%, and 35%
rates for taxing individuals' taxable income, were extended for two years,
through 2012.
New Law. The 2012 Taxpayer Relief Act repeals title IX of EGTRRA (i.e.,
the title that includes the above-described EGTRRA sunset). EGTRRA § 901 (Sec. 901, PL 107-16,
6/7/2001 )
repealed by (2012 Taxpayer Relief Act §101(a)(1))
The effect of the EGTRRA sunset repeal (with the additional
changes described below) is to make permanent the 10%, 25%, 28%, 33%, and 35%
marginal tax rates, and the special inflation adjustment rules for the 10% tax
bracket.
The 2012 Taxpayer Relief Act specifically provides that the
statutory rate schedules for each tax filing status are to be applied (Code
Sec. 1(i)(2) as amended by 2012 Taxpayer Relief Act §101(b)(1)(A)) by substituting a 25% (Code
Sec. 1(i)(2)(A) ) , 28% (Code
Sec. 1(i)(2)(B) ) , and 33% rate (Code
Sec. 1(i)(2)(C) ) for the 28%, 31%, and 36% rates, respectively, listed in those
schedules.
In addition, for tax years beginning after Dec. 31, 2012 (Code
Sec. 1(i)(3)(A) as amended by 2012 Taxpayer Relief Act §101(b)(1)(B)) , the tax rate under the married filing joint/surviving spouse,
head-of-household, single, and married filing-separately tax schedules on a
taxpayer's taxable income in the highest rate bracket will be:
(1) 35%, to the extent it doesn't exceed an
amount equal to the excess of (Code
Sec. 1(i)(3)(A)(i) ) :
(2) 39.6% on the taxpayer's taxable income
that's in excess of the amount to which the 35% rate (described above) applies. (Code
Sec. 1(i)(3)(A)(ii) )
(iv) 1/2 of the
marrieds-filing-jointly/surviving spouse threshold amount (after any inflation
adjustment of that amount) (Code
Sec. 1(i)(3)(B)(iv) ) (i.e., for 2013, $225,000).
For tax years beginning after 2013, each of the dollar amounts
in (i) through (iii) above will be adjusted for inflation in the same manner as
provided under Code Sec. 1(i)(C)(i) (the inflation adjustment
for the 10% tax bracket threshold), except that 2012 is substituted for 1992
under Code
Sec. 1(f)(3)(B) (Code
Sec. 1(i)(3)(C) ) , i.e., the cost-of-living adjustment will equal the percentage
(if any) by which the consumer price index (CPI) for the preceding calendar
year exceeds the CPI for 2012. Thus, as a result of all of the 2012 Taxpayer
Relief Act changes above, after Dec. 31, 2012 individual taxpayers are subject
to seven marginal tax brackets, taxed at 10%, 15%, 25%, 28%, 33%, 35% and 39.6%
rates.
And the 39.6% highest tax rate applies only to
the amount of taxable income (for 2013) that exceeds $400,000 for singles,
$425,000 for heads-of-household, $450,000 for marrieds-filing-jointly, and
$225,000 for marrieds filing separately. (For tax years after 2013, these
highest bracket threshold amounts are adjusted for inflation, as described
above.)
PROJECTED 2013 RATE SCHEDULES
FOR SINGLE INDIVIDUALS
(OTHER THAN HEADS OF
HOUSEHOLDS AND SURVIVING SPOUSES)
If taxable income
is: The tax would be:
-------------------- ----------
Not over $8,925 10% of taxable income
Over $8,925 but
not $892.50 plus 15% of
the
over $36,250 excess over $8,925
Over $36,250 but
not $4,991.25 plus 25%
of the
over $87,850 excess over $36,250
Over $87,850 but
not $17,891.25 plus 28%
of the
over $183,250 excess over $87,850
Over $183,250 but
not $44,603.25 plus 33%
of the
over $398,350 excess over $183,250
Over $398,350 but
not $115,586.25 plus 35%
of the
over $400,000 excess over $398,350
Over $400,000 $116,163.75 plus 39.6%
of the
excess
over $400,000
FOR HEADS OF HOUSEHOLDS
If taxable income
is: The tax would be:
-------------------- -----------
Not over $12,750 10% of taxable income
Over $12,750 but
not $1,275.00 plus 15% of the
over $48,600 excess over $12,750
Over $48,600 but
not $6,652.50 plus 25%
of the
over $125,450 excess over $48,600
Over $125,450 but
not $25,865.00 plus 28% of the
over $203,150 excess over $125,450
Over $203,150 but
not $47,621.00 plus 33%
of the
over $398,350 excess over $203,150
Over $398,350 but
not $112,037.00 plus 35% of the
over $425,000 excess over $398,350
Over $425,000 $121,364.50 plus 39.6%
of the
excess
over $425,000
FOR MARRIED
INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES
If taxable income
is: The tax would be:
-------------------- -----------
Not over $17,850 10% of taxable income
Over $17,850 but
not $1,785.00 plus 15%
of the
over $72,500 excess over $17,850
Over $72,500 but
not $9,982.50 plus 25%
of the
over $146,400 excess over $72,500
Over $146,400 but
not $28,457.50 plus 28%
of the
over $223,050 excess over $146,400
Over $223,050 but
not $49,919.50 plus 33%
of the
over $398,350 excess over $223,050
Over $398,350 but
not $107,768.50 plus 35%
of the
over $450,000 excess over $398,350
Over $450,000 $125,846.00 plus 39.6%
of the
excess
over $450,000
FOR MARRIEDS FILING SEPARATE
RETURNS
If taxable income
is: The tax would be:
-------------------- -----------
Not over $8,925 10% of taxable income
Over $8,925 but
not $892.50 plus 15% of
the
over $36,250
excess
over $8,925
Over $36,250 but
not $4,991.25 plus 25%
of the
over $73,200 excess over $36,250
Over $73,200 but
not $14,228.75 plus 28%
of the
over $111,525 excess over $73,200
Over $111,525 but
not $24,959.75 plus 33%
of the
over $199,175 excess over $111,525
Over $199,175 but
not $53,884.25 plus 35%
of the
over $225,000 excess over $199,175
Over $225,000 $62,923.00 plus 39.6%
of the
excess
over $225,000
As described above, for tax year 2013 , the
35% tax rate bracket for singles applies when taxable income exceeds $398,350.
And as described above, the 2012 Taxpayer Relief Act imposes a 39.6% rate (for
2013) on a single individual's taxable income over $400,000. Thus, this change
virtually eliminates the 35% bracket for 2013 for single taxpayers, as no more
than $1,650 of their taxable income could be taxed at the 35% rate.
For the 2012 Taxpayer Relief Act's permanent
extension of the expanded 15% rate bracket for married joint filers (providing
some relief from the “marriage penalty” within the rate structure).
For the 2012 Taxpayer Relief Act's permanent
extension of reduced rates for kiddie tax and certain withholding (rates tied
to the individual rates above).
For the 2012 Taxpayer Relief Act changes to
the trusts' and estates' income tax rates.
For the 2012 Taxpayer Relief Act changes to
the capital gains and qualified dividends rates.
Effective: For tax years beginning after Dec. 31, 2012. ( 2012 Taxpayer Relief
Act §101(a)(3) ; 2012 Taxpayer Relief Act §101(b)(3) )
www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com
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