Thursday, January 3, 2013

The Tax Implications of the American Taxpayer Relief Act of 2012 | Bellevue Tax Lawyer


In a compromise deal passed a day after the nation began sliding down the so-called “fiscal cliff,” Congress approved tax increases that would affect 77 percent of American households.  The increase that will be most obvious to average Americans will come in the form of the expiration of a 2 percent payroll tax cut that had been enacted during the peak of the recession, thereby restoring the payroll tax to 6.2 percent.  This is expected to limit the short-term spending power of consumers, possibly leading to a slight decline in GDP, while bolstering the long-term health of the national retirement program. 

However, the most long-lasting implications of the ATRA concern significant changes to income and capital gains tax rates.  Individuals with incomes over $400,000 and couples with incomes over $450,000 will see their rates rise from 35 percent to 39.6 percent, thereby fulfilling one of President Obama’s 2012 campaign promises.  However, the bill will keep Bush-era tax rates for incomes below these levels precisely where they were in 2012, providing a significant victory for Republican legislators seeking to preserve the reforms of the preceding administration.  Tax deductions and credits will be phased out for incomes over $250,000 for individuals and $300,000 for couples.  Expansions of the child tax credit, the earned income tax credit, and a $2,500 credit for college tuition—all of which had been sought by the Obama administration—are included in the ATRA.

Capital gains and dividend income over $400,000 for individuals and $450,000 for couples will now be taxed at 20 percent, up from 15 percent.  This is in line with Obama’s 2012 campaign demands, but nevertheless ensures that Bush’s policy of taxing dividends and capital gains equally and gently will be continued. 

The estate tax rate increases from 35 percent to 40 percent on estates valued above the exemption of $5,120,000, with indexing for inflation.  The alternative minimum tax has also been permanently indexed for inflation, thus avoiding the imposition of a tax intended to target only the extremely wealthy on some middle-income earners.  The long-term unemployed will receive relief under the ATRA, which extends unemployment benefits without offsetting cuts in spending to other portions of the federal budget.  Finally—and perhaps quite helpfully for many employees—the congressional deal allows money in pre-tax 401(k) accounts to be converted into Roth 401(k) accounts, an extension of Roth conversions heretofore only available for 401(k) money that was “distributable” (i.e., your vested balance upon retirement age) but that now allows the conversion of everything in traditional 401(k) accounts.

The ATRA is hardly a panacea for the country’s continuing economic woes, and it will have to be reevaluated in two months when $110 billion in delayed spending cuts take effect.  It also contains an “active financing” exemption for manufacturers and financial service providers who avoid double taxation when competing with foreign firms by using foreign subsidiaries to finance the sale of machines and products to overseas customers, a $9 billion tax break that will benefit multinational companies such as J.P. Morgan Chase and General Electric but has raised the ire of labor unions and various corporate watchdog groups. However, the ATRA will require many Americans to reevaluate their tax positions.  Although most taxpayers will wind up paying more taxes in the coming year than in previous ones, it is possible that there are also many additional opportunities now available to them.  For a free consultation on these and other tax-related matters, please contact The Law Offices of Aaron P. Richter, a Bellevue-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

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