Jan 14, 2013
The American Taxpayer Relief Act signed by the President on January 3, 2013 changes the tax law in numerous ways that will affect most taxpayers.
Here is a summary of the key items in the American Taxpayer Relief Act that are likely to impact the real estate industry.
TAX RATES AND RELATED ITEMS
Income Tax Rates: Current income tax rates are extended for married couples having taxable income of $450,000 or less and unmarried individuals having taxable income of $400,000 or less annually. Income above these thresholds will be taxed at a 39.6% rate, up from 35%.
Personal Exemption Phase-Out: Personal exemptions allow a certain amount of income per person for themselves and any dependents they support to be exempt from taxes. For instance, a married childless couple is projected to have a $3,900 exemption per person in 2013 (for a total of $7,800). In the legislation, this exemption is phased out for taxpayers with an taxable income above $300,000 for families and $250,000 for individuals. This exemption phases out at 2 percent for every $2,500 above the threshold incomes identified above. For example, if the couple above has taxable income of $400,000, they are $100,000 above the threshold. (The $100,000 in excess is divided by $2,500 which is 40. 40 is then multiplied by 2% which equals 80%.) As a result, their anticipated $7,800 exemption would be reduced by 80% or $6,240. These taxable income amounts will be indexed annually for inflation.
Restore the Itemized Deduction (“Pease”) Limitation for Taxpayers Whose Income Exceeds $250,000: Typically, taxpayers itemize deductions if their total deductions (state and local taxes, mortgage interest, charitable contributions) are greater than the standard deduction. From 1991 through 2009, the amount of itemized deductions that a taxpayer could claim was reduced when the taxpayer’s adjusted gross income (“AGI”) exceeded a certain amount. This limitation, known as the Pease Limitation, did not apply from 2010 through 2012. The Act restores the limitation for 2013 and thereafter in the case of certain taxpayers having AGI in excess of $250,000 for individual filers and $300,000 for married couples filing jointly. To illustrate, assume that a married couple’s total itemized deductions are $50,000. If they have an AGI of $400,000, an excess of $100,000 over the $300,000 threshold for a joint return, they would multiply the $100,000 by 3 percent and subtract the product $3,000 from their total deductions: thus their allowable itemized deductions would be only $47,000. As before, a taxpayer cannot lose more than 80% of your itemized deductions, no matter how high your income gets. Medical deductions are exempt from these limitations; mortgage interest and charitable giving deductions are not. These adjusted gross income amounts will be indexed annually for inflation.
Alternative Minimum Tax (AMT): Over the years, the AMT has come to apply to increasing numbers of middle-income taxpayers. In order to focus the AMT more on its intended target individual AMT exemption has been permanently increased to $50,600 for unmarried filers and $78,750 for married-joint filers for 2012. Beginning in 2013, these amounts will be indexed to inflation.
Investment Tax Rates: The top capital gains and dividend rate remain at 15% for those below the $450,000/$400,000 taxable income thresholds, but are increased to 20% for those with taxable incomes above those amounts.
Carried Interest: The current law remains in place.
Estate Tax: The current $5,000,000 per-person estate and gift tax exemption remains (with the $5,000,000 indexed for inflation) but the estate and gift tax rate is increased to 40% up from the current 35% rate applicable during 2012.
Many individual and business tax cuts that had been scheduled to expire on or before December 31, 2012 have been extended.
Depreciation: Fifteen year depreciation for “qualified restaurant buildings” and “qualified retail improvements” have been extended for property placed in service through the end of 2013.
Bonus Depreciation: The 50% bonus depreciation provision is extended for one year (also applicable to leasehold improvements).
Accelerated Depreciation: Provides for 50% expensing for qualifying property purchased and placed in service before January 1, 2014 (and January 1, 2015 for certain long-term assets and transportation).
Mortgage Debt Relief: Taxpayers who have mortgage debt canceled or forgiven after 2012 may be required to pay taxes on the amount forgiven. Under the Act, up to $2,000,000 of forgiven debt is eligible to be excluded from income ($1,000,000 if married filing separately) through 2013.
Extension of Tax Incentives for the New York Liberty Zone: The legislation extends through 2013 the time for issuing New York Liberty Zone Bonds.
Sale of Property by S Corporation: Certain S corporations that were formerly C corporations selling assets during 2012 and 2013 will be relieved from paying “built-in gains tax”, so long as their S corporation elections were effective no later than 2007 and 2008 respectively.
Nine Percent Credit Rate Freeze for the Low Income Housing Tax Credit (LIHTC) Program: The LIHTC allowed with respect to a project is generally determined under a formula that looks like the “applicable Federal rate”. As interest rates have been very low over the past few years, the amount of the allowable LIHTC has correspondingly declined. To deal with this, in 2008, Congress adjusted the formula and set a minimum annual credit amount of 9% of “qualified basis” for many projects placed in service before December 31, 2013. The legislation extends the minimum credit to projects that received an “allocation” of LIHTC before January 1, 2014.
Extended Unemployment Insurance: Federal extended unemployment insurance will continue for another year.
WHAT HAS NOT CHANGED
The legislation does not extend the reduction in payroll taxes that was in effect in 2011 and 2012. It also does not reduce or delay imposition of the 3.8% tax on many forms of investment income (and the corresponding increase in the “FICA” tax) that was enacted under the Patient Protection and Affordable Act of 2010 (Health Care Legislation) and that took effect on January 1, 2013.
There are many other provisions in the “fiscal cliff” legislation. The full text of the American Taxpayer Relief Act of 2012 can be found at: http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf.
Please consult a tax professional to evaluate how these changes will affect you.
Michael Slattery, REBNY (Real Estate Board of New York)