The American Taxpayer Relief Act of 2012

Transcription

1 The American Taxpayer Relief Act of 2012 January 2013 kpmg.com

2 The American Taxpayer Relief Act of 2012 President Obama on January 2, 2013, signed the American Tax Relief Act of 2012 (Act) averting the fiscal cliff of tax increases and spending cuts (the latter only temporarily). The Joint Committee on Taxation estimates that the revenue provisions in the Act would reduce revenues by $3.9 trillion over a 10-year period, as measured against the current law baseline. The Act includes provisions that: Extend permanently the 2001 and 2003 current individual income tax rates except for taxpayers with taxable income above a t hreshold amount ($450,000 for married individuals filing a joint return and $400,000 for single taxpayers) Repeal the personal exemption phase-out and the itemized deduction limitation for taxpayers with adjusted gross income at or below $300,000/$250,000 (joint filers/singles) Extend the current tax rates on capital gains and dividends except for taxpayers with taxable income above $450,000/$400,000 (joint filers/singles); for these taxpayers, the capital gains and dividend tax rate is 20% (not including the 3.8% tax on investment income imposed by the Affordable Care Act, which takes effect on January 1, 2013) Provide permanent alternative minimum tax relief by increasing the exemption amount and indexing it for inflation Extend permanently the indexed estate, gift, and generation-skipping transfer tax exemption of $5 million but increase the top rate to 40% Extend the 50% bonus depreciation of capital expenditures for one year, and increase section 179 expensing for one year Extend many expired provisions, through 2013; provisions that expired at the end of 2011, such as the research credit, the Subpart F exception for active financing income, and look-through treatment for payments between related controlled foreign corporations, are extended retroactively from January 1, 2012 The Act also: Defers the budget sequesters until March 2013 Extends federal extended unemployment benefits for one year Includes the Medicare doc fix, which extends current Medicare payment rates for physicians through 2013 The Act does not extend the 2% payroll tax reduction that had been in effect for two years. The date of enactment is January 2,

3 Provisions Affecting Individual Taxpayers Marginal Individual Income Tax Rates The Act extends permanently the 10%, 25%, 28%, 33%, and 35% individual income tax rates in effect in 2012 except for taxpayers with taxable income above a threshold amount for whom the rate will be 39.6%. The threshold amount is $450,000 for married individuals filing a joint return, $425,000 for individuals filing as head of household, and $400,000 for single taxpayers. As under current law, the rate structure is indexed for inflation. Personal Exemption Phase-out and Itemized Deduction Limitation The Act repeals the personal exemption phase-out (PEP) and the limitation on itemized deductions (Pease limitation) for taxpayers with adjusted gross income (AGI) at or below a certain threshold. The threshold is $300,000 for married individuals filing a joint return, $275,000 for head of household filers, and $250,000 for single individuals. Reduced Rates on Capital Gains and Dividends The current maximum tax rate of 15% (or 0% for those below the 25% bracket) on an individual s adjusted net capital gain is extended permanently, except that the rate will be 20% for taxpayers with incomes above a c ertain threshold. T he threshold is $450,000 for married individuals filing a joint return, $425,000 for individuals filing as head of household, and $400,000 for single taxpayers. Under the Act, an individual s qualified dividend income is taxed at the same rates (20%, 15% or 0%) that apply to adjusted net capital gain. Note that beginning January 1, 2013, investment income of certain taxpayers is subject to an additional 3.8% tax imposed under the Affordable Care Act. Alternative Minimum Tax The Act includes permanent alternative minimum tax (AMT) relief. The Act increases the AMT exemption amounts for 2012 t o $50,600 (single taxpayers) and $78, 750 (married individuals filing jointly). T he AMT exemption is phased out when alternative minimum taxable income exceeds certain thresholds. The Act also allows the offset of nonrefundable personal credits against the AMT. The AMT exemption amounts and phase-out threshold are indexed for inflation beginning in

4 Marriage Penalty Relief The Act extends permanently the increase in the basic standard deduction for a married couple filing a j oint tax return to twice the basic standard deduction for a single individual. The Act also extends permanently the increase in the 15% regular income tax bracket for a married couple filing a joint return to twice the 15% bracket for a single individual. Other Provisions Affecting Individuals The Act extends permanently the following provisions, with certain modifications: Child tax credit Dependent care tax credit Adoption tax credit and employer-provided adoption assistance program exclusion Employer-provided child care tax credit The earned income tax credit has been extended, with certain modifications, for five years, through Education Incentives The Act extends permanently, with certain modifications, the following tax provisions relating to education: Coverdell Education Savings Accounts Section 127 exclusion from income for employer-provided education assistance Student loan interest deduction Exclusion from income for certain scholarships Arbitrage rebate exception for certain governmental bonds Treatment of qualified public educational facility bonds The American Opportunity tax credit for college tuition has been extended for five years, through Roth conversions for retirement plans Unlike a traditional individual retirement account, such as a section 401(k) plan, contributions to a Roth plan are not deductible for tax purposes, and qualified distributions from the plan are not taxed. Generally, certain retirement plans, such as a section 401(k) plan, allow participants to convert their pre-tax accounts to Roth accounts in the plan, but only with respect to distributable amounts they can take out of the plan, usually because the participant has reached age 59½ or separated from service. The Act allows any amount in a non-roth account to be converted to a Roth 3

5 account in the same plan, whether or not the amount is distributable. The amount converted would be subject to regular income tax. Estate, Gift, and Generation-Skipping Transfer Taxes The Act permanently extends the estate and gift tax provisions in effect in 2012, including the gift, estate, and generation-skipping transfer tax exemption amount of $5 million per person, indexed for inflation for calendar years after 2011, and the ability to transfer any unused exemption to a surviving spouse at death (i.e., portability). However, the Act sets the top tax rate at 40% (rather than 35% as provided under 2012 law) for taxable amounts over $1 million and creates two new brackets 37% on amounts over $500,000 and 39% on amounts over $750,000. Alaska Native Settlement Trusts The Act extends permanently the provision that generally allows an Alaska Native Settlement Trust to make an irrevocable election to pay tax on taxable income at the lowest rate specified for individuals (rather than the higher rates that generally apply to trusts). Business Tax Provisions Bonus Depreciation The additional 50% first-year depreciation deduction for investment in qualified property is extended for property placed in service in An additional year is allowed for certain long-production period property and certain aircraft. There is no change to the definition of qualified property. The Act allows corporations to elect to take additional AMT credits in 2013 if they agree to forego the use of bonus depreciation on qualified property placed in service in those years and depreciate such property using the straight-line method. The additional credit (which is refundable) is limited to 6% of the amount of such credits that had been generated before 2006 and had not been used in tax years ending before April 1, Also, the additional credit cannot exceed $30 million. Expensing of Certain Depreciable Property The limitation on the amount of property that can be expensed under section 179 is increased to $500,000 for tax years beginning in 2013, with a phase-out beginning when the total amount of eligible section 179 property exceeds $2 million. 4

6 Extension of Expired Provisions General Business Provisions Research and development credit. The Act reinstates the research and development (R&D) credit retroactively from January 1, 2012, through December 31, The Act also modifies rules for taxpayers under common control and rules for computing the credit when a portion of a trade or business changes hands. Work opportunity tax credit. The Act extends the work opportunity tax credit (WOTC) for individuals who begin work for the employer prior to January 1, New markets tax credit. The Act extends through 2013 the new markets tax credit, permitting a maximum annual amount of qualified equity investments for 2012 and 2013 of $3.5 billion each year. Active financing exception. The Act extends retroactively from January 1, 2012, through tax years beginning before January 1, 2014, the active financing exception from Subpart F. Look-through treatment of payments between related controlled foreign corporations. The Act extends retroactively from January 1, 2012, through tax years beginning before January 1, 2014, the current look-through treatment of payments between related controlled foreign corporations (CFCs). Depreciation of certain real property improvements. The Act extends retroactively from January 1, 2012, through December 31, 2013, the 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail store improvements that are placed in service before January 1, Accelerated depreciation for business property on an Indian reservation. The Act extends for two years the placed-in-service date for the special depreciation recovery periods for qualified Indian reservation property to property placed in service before January 1, Extension of seven-year (7-year) straight line cost recovery period for motorsports entertainment complexes. The Act extends for qualified property placed in service before January 1, 2014, the seven-year cost recovery period for property used for land improvement and support facilities at motorsports entertainment complexes. Empowerment zones. The Act extends for two years, through December 31, 2013, the designation of certain economically depressed census tracts as 5

7 empowerment zones. Businesses and individual residents within empowerment zones are eligible for special tax incentives. Extension and increase in authorization for Qualified Zone Academy Bonds. The Act extends the Qualified Zone Academy Bonds (QZABs) program, for calendar years 2012 and 2013, providing $400 million in bond volume per year. QZABs are a form of tax credit bond that offers the holder a federal tax credit instead of interest. Indian employment credit. The Act extends retroactively from January 1, 2012, through December 31, 2013, the business tax credit for employers of qualified employees that work and live on or near an Indian reservation. Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. The Act extends for two years through tax years beginning before January 1, 2014, the provision extending the section 199 domestic production activities deduction to activities in Puerto Rico. American Samoa economic development support. The Act extends the credit allowed for income from active business operations earned in American Samoa through tax years beginning before January 1, 2014, and modifies the credit to make it available to all qualifying manufacturing businesses operating in American Samoa. Extension of railroad track maintenance credit. The Act extends retroactively for tax years beginning after December 31, 2011, and before January 1, 2014, the railroad track maintenance credit. Extension of special expensing rules for U.S. film and television productions. The Act extends for two years retroactively from January 1, 2012, through December 31, 2013, the provision that allows film and television producers to expense the first $15 million of production costs incurred in the United States ($20 million if the costs are incurred in economically depressed areas in the United States). Extension of temporary increase in limit on cover over of rum excise tax revenues to Puerto Rico and the Virgin Islands. The Act extends retroactively from January 1, 2012, through December 31, 2013, the provision providing for payment of $13.25 per gallon to cover over a $13.50 per proof gallon excise tax on distilled spirits imported into the United States. Mine rescue team training credit. The Act extends retroactively for tax years beginning after December 31, 2011, through tax years beginning before January 1, 2014, the credit for the training of mine rescue team members. Election to expense advanced mine safety equipment. The Act extends for two years retroactively from January 1, 2012, through December 31, 2013, the 6

8 provision that provides businesses with 50% bonus depreciation for certain qualified underground mine safety equipment. Extension of enhanced charitable deduction for contributions of food inventory. The Act extends for two years retroactively from January 1, 2012, through December 31, 2013, the provision allowing businesses to claim an enhanced deduction for the contribution of food inventory. Extension of special rule for S corporations making charitable contributions of property. The Act extends retroactively for tax years beginning after December 31, 2011, through tax years beginning before January 1, 2014, the provision allowing S corporation shareholders to take into account their pro rata share of charitable deductions, even if the deductions would exceed the shareholder s adjusted basis in the S corporation. Treatment of certain dividends of regulated investment companies. The Act extends retroactively for tax years beginning after December 31, 2011, through tax years ending before January 1, 2014, a provision allowing a r egulated investment company (RIC), under certain circumstances, to designate all or a portion of certain dividends as an interest-related dividend or a short-term capital gain dividend. Treatment of RIC investments as qualified investment entities under FIRPTA. The Act extends retroactively from January 1, 2012, through December 31, 2013, the inclusion of a R IC within the definition of a qualified investment entity under the Foreign Investment in Real Property Act (FIRPTA) rules. Extension of special tax treatment of certain payments to controlling exempt organizations. The Act extends retroactively from January 1, 2012, through December 31, 2013, the special rules for interest, rents, royalties and annuities received by a tax-exempt entity from a controlled entity. Employer wage credit for activated military reservists. The Act extends retroactively from January 1, 2012, through December 31, 2013, the provision that provides eligible small business employers with a tax credit in an amount equal to 20% of the sum of differential wage payments to activated military reservists. Low-income housing tax credit program. The Act extends the minimum lowincome housing credit rate of 9% by changing the deadline to projects that have received an allocation before January 1, Extension of military basic housing allowances under low-income housing credit. The Act extends retroactively from January 1, 2012, through December 31, 2013, a provision where-by a m ember of the military s basic housing allowance is not considered income for purposes of calculating whether the 7

9 individual qualifies as a l ow-income tenant for the low-income housing tax credit program. Special rules for qualified small business stock. The Act extends the 100% exclusion of the gain from the sale of qualifying small business stock to qualified stock that is acquired before January 1, 2014, and held for more than five years. Reduction in S corporation recognition period for built-in gains tax. The Act extends the reduced five-year holding period for sales occurring in tax years beginning in 2012 and In addition, the Act clarifies rules for carryforwards and installment sales. Extension of tax incentives for the New York Liberty Zone. The Act extends through December 31, 2013, the time for issuing New York Liberty Zone bonds. Individual Tax Extender Provisions Deduction of state and local general sales taxes. The Act extends for two years, through tax years beginning before January 1, 2014, the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes. Above-the-line deduction for certain expenses of elementary and secondary school teachers. The Act extends for two years, through tax year 2013, the $250 above-the-line tax deduction for teachers and other school professionals for expenses including amounts paid or incurred for books, supplies, computer equipment (including related software and s ervice), other equipment, and supplementary materials used by the educator in the classroom. Above-the-line deduction for qualified tuition and related expenses. The Act extends the above-the-line tax deduction for qualified education expenses for tax years beginning before January 1, Extension of provision relating to contributions of capital gain real property for conservation purposes. The Act extends through tax years beginning before January 1, 2014, the increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes. Extension of tax-free distributions from individual retirement plans for charitable purposes. The Act extends for distributions made in tax years beginning before January 1, 2014, the provision that permits tax-free distributions to charitable organizations from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year. 8

10 Premiums for mortgage insurance deductible as interest that is qualified residence interest. The Act extends through December 31, 2013, a provision that allows a taxpayer to claim as an itemized deduction the cost of mortgage insurance on a qualified personal residence. Mortgage debt relief. The Act extends the provision allowing taxpayers who have mortgage debt canceled or forgiven to exclude certain amounts of the forgiven debt from taxable income. This was extended for qualified principal residence indebtedness that is discharged before January 1, Parity for mass transit benefits. The Act extends through December 31, 2013, an increase in the fringe benefit for mass transit, making it equal to the fringe benefit provided for parking. Disclosure of prisoner return information to certain prison officials. The Act permanently extends the authorization of the IRS to disclose certain limited return information about tax violations identified by the IRS to certain prison officials. Energy Provisions Extension and modification of the PTC for wind facilities A production tax credit (PTC) is available for wind facilities placed in service by December 31, Eligible taxpayers can claim a 2.2 cents per kilowatt hour tax credit for a 10 year period. The credit rate is adjusted annually for inflation. The Act extends the placed-in-service date an additional year - i.e., to projects that are placed in service by December 31, The Act further modifies the PTC to allow renewable energy facilities that begin construction before the end of 2013 to claim the PTC. Finally, taxpayers may claim a 30% section 48 investment tax credit (ITC) for renewable energy projects in lieu of the PTC so long as such projects are placed in service during the applicable PTC expiration dates. The one-year PTC extension and begin construction provision also apply to the ITC in lieu of PTC. Biodiesel and renewable diesel. The Act extends through 2013 the $1.00 per gallon production income tax credit for biodiesel, and the small agri-biodiesel producer income tax credit of 10 cents per gallon. The Act also extends through 2013 the $1.00 per gallon production income tax credit for renewable diesel derived from biomass. In addition, the Act extends the excise tax credits and outlay payments for biodiesel and renewable diesel mixtures. 9

11 Extension of energy-efficient new homes credit. The Act extends the tax credit for manufacturers of energy-efficient residential homes through Alternative fuels. The Act extends through 2013 the $0.50 per gallon alternative fuel excise tax credits and outlay payments for various alternative fuels, including liquid fuels derived from biomass, compressed or liquefied biogas, compressed or liquefied natural gas, and liquefied petroleum gas (such as propane). The Act also extends the credits and payments for alternative fuel mixtures. The Act does not extend this credit for any liquid fuel derived from a pulp or paper manufacturing process (i.e., black liquor). Extension of special rule for sales of electric transmission property. The Act extends for two years (for sales prior to January 1, 2014) the present law deferral of gain on s ales of transmission property by vertically integrated electric utilities to FERC-approved independent transmission companies. Energy-efficient appliances. The Act extends through 2013 the credit for manufacturing energy-efficient clothes washers, dishwashers, and refrigerators in the United States. Energy-efficient existing homes. The Act extends through 2013 the period in which the section 25C tax credit (30% credit, $1,500 maximum) for energyefficient property in existing homes, as modified by the American Recovery and Reinvestment Act, can be claimed. Alternative vehicle refueling property. The Act extends the 30% investment tax credit for alternative vehicle refueling property for two years, through Credit for two and three-wheeled plug-in electric vehicles. The Act provides a tax credit for two-and three-wheeled plug-in electric vehicles that are purchased after 2011 and pr ior to The amount of the credit is the lesser of: (1) 10% of the cost of the vehicle or (2) $2,500. Cellulosic biofuel producer credit. T he Act extends the cellulosic biofuel producer credit one year to eligible cellulosic biofuel produced and sold prior to The Act expands the definition of cellulosic biofuel to include certain algae, effective for biofuel produced and sold after the date of enactment. Special allowance for cellulosic biofuel plant property. The Act extends the 50% additional first-year depreciation deduction for cellulosic biofuel plant property one year to property placed in service prior to Extension of production credit for Indian coal facilities place in service prior to The Act extends the period that otherwise qualifying Indian coal facilities may claim the production tax credit from seven years to eight years, 10

12 effective for coal produced after The Act does not extend the placed-inservice deadline for qualifying Indian coal facilities, which is prior to

13 Contact us Harry L. Gutman Principal in Charge Federal Tax Legislative & Regulatory Services KPMG s Washington National Tax 1801 K Street, NW Washington, DC hgutman@kpmg.com kpmg.com Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any matters addressed herein KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. NDPPS