Pub. 2 2013 Issue 2

14 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s EFFECTS OF THE AMERICAN TAXPAYER RELIEF ACT OF 2012 By BrianMall O n January 1, 2013, both houses of Congress voted to pass theAmerican Taxpayer Relief Act of 2012. The act softened the blow of the fiscal cliff. While some provisions did not revolve around taxes, the vast majority of the act focused on tax rates, tax extenders and the estate tax. Some of the provisions are permanent. Here is an overview of the key tax provisions that likely will affect your bank and its shareholders. Key Individual Provisions w Tax Rate Changes – The act permanently extends the 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent income tax brackets for tax years after 2012. However, bank shareholders with income of more than $400,000 for single filers ($450,000 for married filing jointly) will be subject to a higher 39.6 percent tax rate. w Personal Exemptions & Itemized Deductions – Beginning in 2013, bank shareholders with adjusted gross income (AGI) of more than $250,000 single filers ($300,000 for married filing jointly) will find that their personal exemptions and certain itemized deductions will be phased out, commonly referred to as a stealth tax. Personal exemptions will be reduced by 2 percent for each $2,500 of income in excess of the applicable threshold until the benefit of all personal exemptions is eliminated. Certain itemized deductions will be reduced by 3 percent of the excess of AGI over the applicable threshold until up to 80 percent of the allowable itemized deductions are eliminated. Medical expenses, investment interest, theft losses, gambling losses and casualty losses are not subject to the itemized deduction phase-out rule. w Capital Gains&QualifiedDividendRates – For tax years beginning after 2012, bank shareholders with income of more than $400,000 for single filers ($450,000 for married filing jointly) will find that the top income tax rate on long-term capital gains and qualifying dividends has increased permanently to 20 percent. w Estate Tax – The act permanently increases the top estate gift and generation-skipping transfer tax rates from35 percent to 40 percent after December 31, 2012. In addition, the estate tax exemption amount is set at $5 million, indexed annually for inflation. The portability election, which allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse, is permanently extended for decedents dying after December 31, 2012. Key Business Provisions w Reduction in S Corporation Recognition Period for Built-In Gains Tax – Following conversion of a taxable corporation to an S corporation, the bank must hold its assets for a certain period in order to avoid tax on any built-in gains existing at the time of the conversion. The act extends the reduced five-year holding period for asset sales occurring in 2012 and 2013. w Temporary Extension of Bonus Depreciation – The act extends the current 50 percent expensing provision for qualifying property purchased and placed in service before January 1, 2014. w TemporaryExtension to Increase inSection179MaximumAmount & Phase-out Threshold – Rather than depreciating an asset over its depreciable tax life, Section 179 allows taxpayers to deduct the cost of certain property placed in service for the year. The act extends through 2013 the increased limit and phase-out threshold of $500,000 and $2 million, respectively. w 15-Year Straight-Line Cost Recovery forQualified Improvements – The act extends through 2013 the 15-year cost recovery period for certain leasehold, restaurant and retail improvements, as well as new restaurant buildings placed in service before January 1, 2014.