The American Taxpayer Relief Act (Act) has permanently extended the
reduced tax rates of 10, 25, 28 and 33 percent that were a result of
the Economic Growth and Tax Relief Reconciliation Act of 2001. The
top tax rate of 35 percent has been made permanent for taxable
incomes up to $400,000 on a single filing, $425,000 for head of
household and $450,000 for a joint return.
The tax rate on incomes above those threshold amounts will return to
the 39.6 percent rate in effect prior to the 2001 Act. All taxable
income threshold amounts will be indexed for inflation after 2013.
taxable income threshold amounts will be indexed for inflation after
Itemized Deduction Personal Exemption Limits
The Act is reinstating and making permanent the personal
exemption phase-out and the itemized deduction limitations under
pre-2001 law. The personal exemption of $3,900 (for 2013) will be
reduced by 2 percent for each $2,500 (or fraction thereof) that the
taxpayer's adjust gross income (AGI) exceeds $250,000 for a single
filer, $275,000 for a head of household or $300,000 for a joint
Those same income thresholds will apply to an
itemzied deduction limit which reduces the value of certain itemized
deductions by 3 percent of the amount by which AGI exceeds the
income threshold. This limitation does not apply to medical
expenses, investment interest or casualty and theft losses. The
income thresholds will be indexed for inflation after 2013.
Child Tax Credit
The current child tax
credit of $1,000 per eligible child has been made permanent but will
not be indexed for inflation. The additional child tax credit which
provides for the credit to be refundable up to 15 percent of earned
income in excess of a certain amount has also been made permanent.
The credit will also be permanently allowable regardless of a
taxpayer's alternative minimum tax (AMT).
The standard deduction for married couples
($12,200 in 2013) has been set permanently to twice the value of
single individuals and the width of the 15 percent tax bracket for
joint returns has been permanently set to twice the width of single
The exclusion from
taxable income of employer-provided educational assistance for both
undergraduate and graduate-level courses has been extended under the
The expansion of the deduction for student loan interest
that was enacted in 2001 has been made permanent and the income at
which the deduction begins to phase out has been raised to $60,000
for single individuals and $125,000 for joint returns. The Act
permanently allows the deduction of voluntary interest payments and
repeals the 60 month limit during which interest paid can be
credit rate for the child and dependent care tax credit has been
permanently extended from 30 to 35 percent. The Act also permanently
extends the maximum eligible expenses from the previous $2,400 to
$3,000 ($4,800 to $6,000 for two or more eligible children) and the
increase in the credit phase-out from $10,000 to $15,000 of AGI.
The expansion of the
adoption credit enacted in 2001 has been permanently extended and
the credit is allowed regardless of AMT. The expense limit and
exclusion from taxable income of employer-provided adoption
assistance is increased to ($12,770 in 2013) for special needs and
non-special needs children and the credit and exclusion are
available for special needs children regardless of the actual
The increase in the income phase-out starting point
has been permanently extended and indexed for inflation which
produces a starting phase-out of $191,530 for 2013. The Act did not
extend the refundability of the adoption credit as first enacted by
the Affordable Care Act.
Estate and Gift Tax
The estate tax provisions of the 2001 and 2010 Acts have been
permanently extended. The unified exemption for estate and gift tax
purposes ($5.25 million in 2013) has been extended and indexed for
inflation but the tax rate has been raised from 35 percent to 40
percent. The portability of the exemption between spouses which
allows a decedent to elect to permit the surviving spouse to claim
any unused exemption is now permanent.
The 2001 decrease in the tax rate on long-term capital gains
from 20 percent to 15 percent for taxpayers not in the 39.6 percent
tax bracket and from 10 percent to 0 for taxpayers in the bottom two
tax brackets has been made permanent.
For taxpayers in the
39.6 percent tax bracket, the long-term capital gains tax will
revert back to the pre-2001 rate of 20 percent. The Act also makes
permanent the repeal of the 18 percent rate on gains from the sale
of assets held for five or more years.
The Act permanently extends the
preferential tax treatment of qualified dividends under the 2001 Act
which taxes qualified dividends under the same rate structure as
long-term capital gains.
Tax Provisions Extended
Several individual, business, and energy tax provisions that
expired at the end of 2011 or 2012 were extended through 2013. The
most significant extensions in each group are described below.
● Above-the-line deduction of up to $250 for teacher classroom
● The exclusion from gross income for mortgage debt that is
discharged (forgiven) by the lender.
● Tax benefits for employer-provided mass transit.
● Allowance of an itemized deduction for mortgage premium insurance.
● The itemized deduction for state and local general sales taxes, in
lieu of a deduction for state and local income taxes.
● The above-the-line deduction for qualified tuition and related
● Tax-free distributions for charitable contributions from IRAs by
individuals who are at least 70 ½ years old.
● The credit for research and experimentation expenses.
● The new markets tax credit ($3.5 billion allocation in 2012 and
● The 50 percent credit for expenditures to maintain railroad
● The work opportunity tax credit (WOTC), including eligibility of
recently discharged veterans.
● Qualified zone academy bonds ($400 million allocation in 2012 and
● Accelerated depreciation for leasehold, restaurant, and retail
● Accelerated depreciation for business property on Indian
● Enhanced charitable deduction for contributions of food inventory.
● An increase in the section 179 expensing amount limit to $500,000
and the investment threshold for reducing the amount expensed to $2
● Special expensing rules for certain film and television
● Deduction for domestic production activity income in Puerto Rico.
● The exception for active financing income under subpart F.
● Favorable treatment of certain payments between related controlled
● Special rules for qualified small business stock.