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Elements of ATRA The American Taxpayer Relief Act (ATRA) became law on January 2, 2013. ATRA: (1) repealed the sunset of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA); (2) increased tax rate; (3) increased the capital gains rate; (4) re-introduced the “stealth” taxes by reduction of itemized deductions and personal exemptions; (5) created “permanent” alternative minimum tax relief; and (6) extended estate and gift tax exemptions established in 2010. ATRA relief retained some of the Bush-era tax policies and avoided government spending cuts, although resolution of the debt ceiling question has only been deferred. ATRA was a compromise. The administration wanted higher tax rates on incomes of at least $250,000 (citing those successful families and individuals as “rich”), while Republicans resisted higher rates. The definition of rich settled at singles making over $400,000, and $450,000 for married joint filers. Repeal of EGTRRA Sunset EGTRRA provided significant tax breaks from 2001 through 2012, particularly in the area of capital gain rates, estate taxes and gift taxes. EGTRRA was scheduled to sunset after 2010, meaning that we would return to higher tax rates in effect before 2001. Both sides agreed to defer the EGTRRA sunset at the end of 2010 to December 31, 2012, at which time the government would face its self-imposed fiscal cliff. When the dust settled, both sides claimed victory when they made by G. Scott Haislet EGTRRA permanent under ATRA, with no possibility of sunset in the future. Income Tax Rates ATRA retained existing 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent rates that prevailed pre-ATRA. Absent ATRA, these rates would have been materially higher. ATRA added a 39.6 percent rate for income above the applicable threshold of $400,000 for single taxpayers, $450,000 for married joint filers and $425,000 for heads of household. The applicable threshold will be adjusted annually for inflation. The tax brackets on which income is taxed at 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent will be adjusted annually for inflation. These favorable policies retain the “bracket creep” avoidance policy dating from the 1980s. Capital Gain Rates ATRA retained the zero percent and 15 percent long-term capital gain rates. That means zero percent capital gain rate will apply to gains that would otherwise be subject to 10 percent or 15 percent ordinary rate; 15 percent will apply to gains that would otherwise be subject to 25 percent, 28 percent, 33 percent or 35 percent ordinary rate. ATRA imposes a 20 percent longterm capital gain rate on income above the applicable threshold (e.g., above $450,000 for married joint filers and $400,000 for singles). That means that 20 percent capital gain rate will apply to gains that would otherwise by subject to the 39.6 percent ordinary rate. For example, it will be possible for a gain to be taxed partially at 15 percent and partially at 20 percent. Long-term capital gain rates will apply to gains on sales of capital assets and on “qualified” dividends. A dividend is qualified if taxpayer holds the stock at least 61 days during the 121-day period that begins 60 days before the stock goes ex-dividend. Note: a new 3.8 percent tax will apply to net investment income (interest, dividends, gains, etc.) for those with “modified” adjusted gross income of $200,000, and $250,000 for married joint filers; that tax began January 1, 2013, under federal tax code section 1411, which was adopted by Congress in 2010. Thus, top federal long-term capital gain rates are effectively 23.8 percent. 12 MARCH 2013
ATRA also retained the 25 percent rate on “unrecaptured section 1250 gain,” which is taxpayer’s accumulated depreciation on real estate. Example: taxpayer buys commercial property for $1 million in 2005; taxpayer sells the property for $1.2 million on February 1, 2013, at which date accumulated depreciation was $100,000. Taxpayer will pay tax at applicable capital gain rate on $200,000 ($1.2 million minus $1 million purchase price) and pay 25 percent on $100,000 unrecaptured section 1250 gain. Taxpayer will avoid both the capital gain tax and 1250 gain tax in the event of a successful 1031 exchange. The new 3.8 percent tax will apply to the unrecaptured section 1250 gain. Stealth Increases Without increasing tax rates, taxes increased during the Clinton administration by reducing deductions for personal exemptions and certain itemized deductions. EG- TRRA reduced those stealth tax increases in 2005-2008 and eliminated them from 2009-2012. Thus, for 2012, each individual was entitled to a personal exemption of $3,800 irrespective of income. A married couple without children would save $7,600 in taxable income. A married couple with two dependents would save $15,800 in taxable income. Under ATRA beginning in 2013, personal exemptions are phased out for adjusted gross income (AGI) over $250,000, and $300,000 for married joint filers. Beginning in 2013, itemized deductions for mortgage interest, taxes, charity, and miscellaneous deductions will be reduced for single taxpayers with AGI over $250,000, and $300,000 for married joint filers. The reduction of itemized deductions is 3 percent times that sum above applicable AGI. Alternative Minimum Tax (AMT) AMT is an alternative taxation system. Each individual taxpayer computes his income tax under the “regular” and “alternative” systems, paying the higher of the two. The regular system is AGI minus itemized deductions, minus personal exemptions, the result being taxable income subject to the tax rates discussed above. The AMT system is AGI, modified for certain items, minus itemized deductions (except that deductions for taxes and miscellaneous deductions are not permissible under AMT), the result being alternative taxable income subject to 26 percent or 28 percent rates. Note: many Californians fall into AMT because of high state income taxes. A relatively large personal exemption frees most taxpayers from AMT concern. The higher the personal AMT exemption, the more likely a person would not be subject to AMT. The previous permanent AMT exemptions were $45,000 for married joint filers and $33,750 for singles. Beginning with EGTRRA, the exemptions were temporarily increased with an AMT “patch”; laws Morrill Law Firm 1333 N. California Blvd., Ste 620 • Walnut Creek, CA 94596 Phone 925.322.8615 • Fax 925.357.3151 Will & Trust Litigation Financial Elder Abuse Conservatorships General Civil Litigation Probate & Civil Appeals Mediation Joseph Morrill Andrew R. Verriere Nicole Morrill Paralegal CONTRA COSTA COUNTY BAR ASSOCIATION CONTRA COSTA LAWYER 13
Page 1 and 2: Contra Costa LAWYER Volume 26, Numb
Page 3 and 4: TED AND HIS CALIFORNIA FORMS WERE I
Page 5 and 6: 2013 BOARD OF DIRECTORS Jay Chafetz
Page 7 and 8: CCCBA - It’s Your Organization pr
Page 9 and 10: erations and those concerned with g
Page 11: The California Cliff by Mark Ericss
Page 15 and 16: Business Tax Provisions of ATRA 201
Page 17 and 18: IRS Return Preparer Regs Derailed b
Page 19 and 20: Annual Officer Installation January
Page 21 and 22: Meet Your New Commissioner: ANITA S
Page 23 and 24: Meet Your Local Judges, Family and
Page 25 and 26: RES IPSA JOKUITOR XVIII THE JOKE SP
Page 27 and 28: Elder Abuse Litigation Will & Trust
Page 29 and 30: Unfortunately, the rate reduction e
Page 31 and 32: Win A $100 GIFT CARD! We will be se
Page 33 and 34: that can be expensive for the clien
Page 35 and 36: CALENDAR UPCOMING EVENTS | OVERVIEW
Page 37 and 38: April 25 | Employment Section The E
Page 39 and 40: Why YOU should make referrals to CC

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