A Breakdown of the American Taxpayer Relief Act of 2012 (ATRA) - Part 1

A Breakdown of the American Taxpayer Relief Act of 2012 (ATRA) - Part 1

[caption id="attachment_433" align="alignleft" width="150"]Robert K. O’Dell, CFP Robert K. O’Dell, CFP[/caption]

On January 1st, my family and I had the opportunity to attend the Outback Bowl in Tampa, which featured the University of Michigan playing against the University of South Carolina. The game was perhaps the most exciting of all the New Year’s Day bowl games with momentum shifting back and forth between the Wolverines and the Gamecocks for all four quarters. As the game clock ticked to a close, Michigan was up with just a few seconds to go when South Carolina’s back-up quarterback threw the winning touchdown pass for the Gamecocks. It was final. Game Over.

While we watched the game, our congressmen and women in Washington, D.C. battled over their own political football as they negotiated the details to a bill to avert the Fiscal Cliff. However, the winners would not be determined based upon solid play calling or superior talent, or, as in this year’s Outback Bowl, by whichever team had their hands on the ball in the final seconds. After much wrangling, and with no time to spare, Congress did manage to settle on a compromise with their 2013 tax package--the political and financial ramifications will likely take some time to play out. Wish you could have an official review? How about a tax act highlights, instead?

Here’s an initial tax overview of HR 8 – ATRA:

Tax Brackets

A permanent extension of the Bush-era income tax rates on all incomes, except for individuals who make more than $400,000 and married couples who earn over $450,000 annually. For taxpayers above those thresholds, the top tax bracket rises to 39.6%. (Note: bear in mind that the law bases tax brackets upon taxable income after all deductions, not Adjusted Gross Income.)

Unlike the Bush-era tax cuts, these new tax rates are permanent - i.e., they do not include a sunset provision that would cause them to expire. No setting back the clock, no instant replay.

Capital Gains and Dividends

ATRA makes permanent the 0% and 15% long-term capital gains tax rates for those not in the top tax bracket (39.6% bracket with the $400,000 single and $450,000 married annual income thresholds). However, for those in the top brackets the long term capital gains and qualified dividend tax rises from 15 to 20 percent.

Notably, the new Medicare investment income surtax that went into effect on January 1st, will tax investment income at an additional 3.8% starting at $200,000 (single) and $250,000 (married couples). This means a married couple with an Adjusted Gross Income (AGI) of $300,000, of which $50,000 is investment income, will pay a federal tax on that investment income of 18.8%.

No More AMT Drama

Going forward, we, the tax payers are relieved from the annual drama of Congress waiting until the 11th hour to patch the Alternative Minimum Tax (AMT), since ATRA makes AMT patch permanent. The new AMT exemption amount will come to $78,750 for married couples and $50,600 for singles in 2012. For the first time, the AMT exemption amounts will be indexed for inflation in the future.

In Part 2, we will look at the final three most important features of the American Taxpayer Relief Act of 2012.

We would love to discuss how the ATRA affects you and your family. Give us a call or send us an email:

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