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American Taxpayer Relief Act of 2012 – Last Minute Tax Law Changes

Total Wealth Planning

As in typical government fashion our legislative bodies waited to the last minute of the last hour to pass the American Taxpayer Relief Act of 2012 (ATRA). The new legislation, effective beginning in 2013, extends the majority of the tax cuts that were set to expire at the end of 2012 and in addition retroactively reinstates a number of tax rules that expired in 2011. These changes are permanent with no sunset provision in place. We thought it was prudent to inform you of the more notable changes to the law.
As more of the details are made available, we will be communicating relevant information and incorporating the new laws into our proactive tax planning.
Proactive tax planning throughout the year is the key to reducing taxes over your lifetime and maximizing your after-tax dollars for wealth accumulation. This is accomplished by applying changing tax laws to your specific situation.

What Are the Changes?

Income Tax Brackets

The top tax bracket increases from 35% to 39.6%, and applies to taxable income above $450,000 for married couples filing jointly, $400,000 for individuals, and $425,000 for head of household filers. All other individual tax rates remain the same (10%, 15%, 25%, 28%, 33%, and 35%).

Capital Gains and Qualified Dividends

For those taxpayers in the 15% and 10% marginal bracket, they will continue to pay 0% on long-term capital gains and qualified dividends. Taxpayers in the 25% – 35% marginal brackets will be subject to 15% tax on long term capital gains and qualified dividends. Those taxpayers in the highest 39.6% marginal bracket will be subject to a 20% tax on long term capital gains and qualified dividends. It is important to keep in mind that those taxpayers subject to the 20% tax rate will find their net investment income subject to the new 3.8% Medicare surtax. Insert link to Obama care blog

Estate and Gift Tax

The estate and gift tax exclusion is $5.12 million in 2012 ($5.25M for 2013) for individuals with a permanent portability provision allowing a total of $10.24 million for married couples. The exclusion amount will increase each year indexed for inflation. However, the tax rate for taxable estates exceeding the threshold will be 40%.

Phaseout of Itemized Deductions and Personal Exemptions

This law is reinstated beginning in 2013. The phaseout for itemized deductions reduces total itemized deductions by 3% of the excess over the Adjusted Gross Income threshold of $300,000 for married couples filing jointly and $250,000 for individuals.
The personal exemptions phaseout reduces personal exemptions by 2% of the total exemptions for each $2,500 of excess income over the threshold amounts of $300,000 for married couples filing jointly and $250,000 for individuals. Both laws are permanent and indexed for inflation.

Alternative Minimum Tax (AMT)

The exemption amount for AMT is patched for 2012 and made permanent. The AMT exemption for 2012 will be $78,750 for married couples filing jointly and $50,600 for individuals. These amounts will be indexed for inflation in the future.

New Roth Conversion Flexibility

This is an entirely new addition to the law. It allows individuals to convert their existing 401(K) plan to a Roth 401(K) plan, if the employer offers a Roth 401(k) option under the employer plan. This new rule is extended to not only 401(k) plans but includes 403(B) and 457 plans as well.

IRA Charitable Rollover

The law extends a provision until December 31, 2013 allowing for a qualified charitable distribution from a traditional IRA to an eligible charitable organization. The provision has a cap of $100,000 annually and is eligible to those individuals who are 70 ½ or older.
Tax planning is complex and requires the guidance of a trusted and experienced advisor, such as a fee-only Certified Financial Planner™ (CFP®), who plans comprehensively, and with a complete understanding of your particular concerns and goals in life.
For more information about the quiet millionaire® approach, please visit us at or contact Rob Lemmons, CFP®, CPA, AIF at 513-984-6696.

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