American Taxpayer Relief Act of 2012

The American Taxpayer Relief Act of 2012, in effect, prolonged many of the tax cuts enacted under President George W. Bush’s administration. The act raised rates for higher-income groups while maintaining several lower tax rates.

A Breakdown of the 2012 American Taxpayer Relief Act

The American Taxpayer Relief Act of 2012 (ATRA) was approved to stop a series of austerity measures collectively known as the fiscal cliff from going into effect on January 1, 2013. In February 2012, Federal Reserve Chair Ben Bernanke referred to a set of tax increases and spending reductions outlined in the Budget Control Act of 2011.

A large number of tax cuts passed between 2001 and 2010 were set to expire after 2012 due to the “fiscal cliff,” which threatened to halt the Great Recession’s early recovery. The four tax acts that expired were as follows.

Most taxpayers received income tax reductions gradually thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Still, all reductions were set to end in 2010 to prevent conflicts with Senate regulations (Joint Committee on Taxation 2001).

The Jobs and Growth Tax Relief Reconciliation Act of 2003 decreased tax rates on capital gains and qualifying dividends, also with sunset dates, while hastening the phase-in of other EGTRRA features (Joint Committee on Taxation 2003).

The American Recovery and Reinvestment Tax Act of 2009 (Division B, Title I of the American Recovery and Reinvestment Act, or ARRA), which was passed in 2009, provided several short-term tax breaks intended to boost the economy. However, all of these tax breaks were set to expire at the end of 2010.

The majority of the provisions of the three bills were extended through 2012 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. (Urban-Brookings Tax Policy Center 2010).

Another tax law, the Temporary Payroll Tax Cut Continuation Act of 2011, increased the reduction in employees’ payroll tax contributions from 6.2 percent to 4.2 percent through 2012. The American Taxpayer Relief Act did not extend that clause.

According to an analysis of the scheduled expirations conducted by the Tax Policy Center, if they weren’t extended (including the temporary payroll tax decrease), taxes would have increased by more than $500 billion in 2013 or over $3,500 per household on average. Approximately 90% of Americans would have experienced increased tax obligations.

On January 1, 2013, Congress enacted the American Taxpayer Relief Act of 2012 to extend most of the sunsetting tax cuts. Except for the highest-income individuals, most of the income tax reductions between 2001 and 2003 became permanent. While permanent modifications to the estate tax and alternative minimum tax decreased the number of people affected and indexed both provisions for inflation, they also prolonged three ARRA provisions through 2017 and were indexed for inflation.

ATRA only addressed the fiscal cliff’s taxing portion. Several months later, federal spending would be considered part of the sequester process.

The enactment of ATRA averted the expiration of the majority of the significant tax reductions passed between 2001 and 2010. The tax breaks outlined in the Jobs and Growth Tax Relief Reconciliation Act of 2003 and the Economic Growth and Tax Relief Reconciliation Act of 2001 were made permanent by this legislation.

The tax reductions included in the American Recovery and Reinvestment Act of 2009 were extended by ATRA through 2017. ATRA repealed tax cuts for the top earnings that had been passed with the backing of the George W. Bush administration and raised many Americans’ payroll taxes.

According to the White House, the act would cut the budget deficit by $737 billion.

Political Aspects of the 2012 American Tax Relief Act

In the last months of 2012, as the fiscal cliff grew closer, Congress debated three different options. First, it may do nothing and let the tax increases and spending reductions go into effect.

Most experts concur that doing so would have impeded economic expansion to the point where the United States would have entered a new recession. For members of Congress, the political ramifications would have been disastrous.

The second choice was to enact legislation that would repeal the entire austerity program. This course of action would have almost certainly increased American debt and jeopardized the federal government’s creditworthiness.

A third choice was a middle road. This was an effort to restrict the growth of the nation’s debt using a mix of spending cuts and tax hikes.

Republicans in Congress were eventually convinced to accept a small number of politically acceptable tax increases despite their strong opposition to tax and expenditure reduction.

Ultimately, Congress chose the third alternative, enacting ATRA’s tax provisions to address budget reductions through the ensuing sequestration procedure.

Income Tax Provisions

• Tax Rates: The fundamental marginal tax rate structure of 10, 15, 25, 28, 33, and 35 percent was preserved by ATRA for taxable income under $400,000 ($450,000 for married taxpayers filing jointly); the levels were adjusted for inflation after 2013. The marginal tax rate for taxpayers with taxable income above the thresholds is 39.6%.
• Pease and PEP: Only taxpayers with adjusted gross incomes of $250 000 or more ($300 000 for married taxpayers filing jointly) are subject to the itemized deduction cap (Pease) and the personal exemption phaseout (PEP). The thresholds are increased for inflation after 2013.
• Child Credits: The $1,000 per child tax credit is refundable up to 15% of earnings exceeding $10,000. (indexed for inflation after 2001). The refundability threshold was temporarily lowered to $3,000 under another ATRA rule. Beginning with qualified expenses up to $3,000 per kid (up to a maximum of $6,000), the child and dependent tax care credit rate is 35 percent. It gradually decreases to 20 percent between adjusted gross incomes of $15,000 and $43,000.
• Marriage Tax: For joint filers, the standard deduction and the 10% and 15% tax brackets equal twice as much as for single filers. (ATRA also temporarily increased the joint filers’ higher earned income tax credit phaseout threshold.)
• Education Tax: ATRA kept the Coverdell education savings account yearly contribution limits higher, and the student loan interest deduction phaseout ranges higher.
• Capital Gains and Dividends: ATRA maintained 15 percent tax rates on long-term capital gains and qualified dividends for taxpayers in all but the top income tax bracket; the law also establishes a 20 percent rate for those in the top bracket (0% for those who would otherwise be in the bottom two tax brackets).
• Alternative Minimum Tax: ATRA established the exemption level for the 2012 AMT at $50,600 ($78,750 for married taxpayers filing jointly) and adjusted it for inflation along with the exemption phaseout threshold and future tax brackets.

Are There Any Positive Tax Results?

Tax rates are unchanged for the lower tax brackets even if the act undoubtedly increases taxes for the top tax bracket.

The act allowed several tax deductions and credits to be extended. For instance, charitable contributions from Individual Retirement Accounts (IRAs) by people at least 70 1/2 years old will be considered tax-free distributions. Tax credits relating to children, adoption, and dependent status are still in effect.

Additionally, many tax credits and deductions will still be available to employers, teachers, and other taxpayer groups.

Getting Legal Assistance

A visit with a knowledgeable tax attorney helps you understand how different tax deductions and credits apply and to get professional legal advice regarding your tax status.

You can create a plan to optimize your future tax planning while maintaining compliance with numerous tax rules with the help of a tax attorney.