President Obama has signed the American Taxpayer Relief Act of
2012 (the "Act"). The Act partially averts the so-called
"fiscal cliff," making permanent many Bush-era tax rate
provisions while increasing taxes on upper-bracket individuals.
Individual income tax rates. The Act reinstates a top marginal
federal income tax rate of 39.6% for taxable income above $450,000
for married taxpayers filing jointly or $400,000 for single filers.
The marginal tax rates on income below those thresholds remain the
same as in 2012 for all taxpayers.
Capital gains and qualified dividend income. Capital gains and
qualified dividend income are subject to tax under the Act at a
maximum rate of 20% for individual taxpayers in the 39.6% bracket
described above. The Act retains 2012 tax rates on capital gains
and qualified dividend income for other taxpayers, so that a 15%
rate continues to apply to middle-bracket taxpayers. Without this
legislation, taxes on qualified dividend income would have reverted
to the applicable marginal ordinary income rates.
Limitations on deductions for taxpayers with income above
$250,000. The Act phases out certain itemized deductions and
personal exemptions for married individuals filing jointly with
adjusted gross income above $300,000 and single filers with
adjusted gross income above $250,000. These limitations, which have
received less attention in the popular press, effectively increase
tax rates for affected taxpayers, including many who are not
subject to the new 39.6% marginal rate.
Roth conversions for retirement plans. The Act includes an
unexpected amendment to the rules for Roth contributions to 401(k)
and similar defined contribution plans, expanding the ability of
such plans to allow participants to convert portions of their
accounts to Roth accounts by removing the requirement that the
participant be eligible to take a distribution of the portion that
is selected for conversion.
Permanent extension of certain employee benefits. By
eliminating the sunset provisions of key 2001 tax legislation, the
Act permanently extends certain popular tax-free employee benefits,
such as employer-provided educational assistance.
Individual and business extenders. The Act includes a package
of individual and business "tax extenders," such as bonus
depreciation deductions, certain exemptions from U.S. withholding
taxes for foreign shareholders of regulated investment companies,
and the research and development tax credit (which is also expanded
in some cases).
Estate, gift and generation-skipping transfer taxes. The estate
tax exemption amount of $5 million, indexed from 2010, is made
permanent, and the maximum estate tax rate is increased from 35% to
40% for decedents dying after December 31, 2012. The gift tax and
the generation-skipping transfer tax (GST tax) are also permanently
subject to the same exemption amount of $5 million (as indexed) and
rate schedule. Importantly, the ability of the executor of a
deceased spouse's estate to transfer any unused gift and estate
tax exemption to a surviving spouse has also been made
The Act does not extend the 2011-2012 payroll tax holiday, and
it leaves in place the new 0.9% additional Medicare tax on wages
over $250,000 for married joint filers and $200,000 for single
filers. The Act also does not affect the 3.8% surtax, effective
January 1, 2013, on "net investment income" of certain
individuals, estates, and trusts. The 3.8% surtax is described in
more detail in our
Alert of December 7, 2012.
In 2014, the U.S. Tax Court issued two opinions with significant implications in the captive insurance world. On January 14, 2014, the court issued a reviewed decision in Rent-A-Center, Inc. v. Commissioner.
Employers with medical reimbursement plans such as health reimbursement arrangements need to review them as soon as possible, to make sure they don’t accumulate heavy tax penalties from noncompliance with Affordable Care Act rules.