The American Taxpayer Relief Act of 2012 (ATRA) took effect in January 2013 after it was signed by President Barack Obama. This act extended tax relief programs for up to five years and added some temporary tax cuts established between 2001 and 2010 to the permanent tax code. The latter category includes the changes made in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. The extended tax cuts include those of the American Recovery and Reinvestment Tax Act of 2009.
The looming expiration of many tax cuts from the previous decade led economists to predict a “fiscal cliff” that would limit the country’s recovery from the Great Recession. An analysis by the Tax Policy Center, a nonpartisan analysis firm, found that failure to renew these provisions would result in increased tax liability for 90 percent of Americans, with an average per-household increase of $3,500.
The tax cuts that became permanent under ATRA maintain the basic marginal tax rate structure for individuals with taxable income of less than $400,000, or $450,000 for married taxpayers filing jointly. There are limits on personal exemptions, and the itemized deductions threshold was raised to $250,000 for individuals and $300,000 for married taxpayers filing jointly, with planned increases indexed for inflation each year. The standard deduction and 10 and 15 percent tax brackets for married couples filing jointly are double those for single filers.
ATRA established a tax credit of $1,000 per child per year with the ability to receive a refund for 15 percent of earnings over $10,000, as well as a child and dependent care tax credit of $3,000 per child up to a maximum of $6,000 with the ability to deduct 35 percent of eligible expenses.
Annual contribution limits for Coverdell education savings accounts were increased and student loan interest deduction thresholds were raised. The Earned Income Tax Credit and a college tuition credit, both designed to provide relief for low-income families, were extended for five years.
All taxpayers except those in the top tax bracket will pay 15 percent tax on long-term capital gains and qualified dividends. A ceiling of 40 percent has been established for the estate tax rate. Gift and estate taxes are now subject to a $5 million exemption with annual indexed inflation beginning in 2011.
An alternative minimum tax exemption (AMT) has been established starting at $50,600 ($78,750 for married-filing-jointly taxpayers), permanently indexed for inflation, as a measure to provide relief for middle-class taxpayers.
The following tax cuts were extended through the 2017 tax year:
Some of the provisions of ATRA were updated by the Tax Cuts and Jobs Act signed by President Trump in 2017. These are some of the biggest changes of which taxpayers must be aware:
Other new provisions for individual and estate taxation under the Tax Cuts and Job Act are set to expire in January 2025. If this act is not renewed before 2025, they will revert to 2017 levels after this expiration date. Some of the most important of these provisions include:
Other provisions that will revert in 2025 if not renewed include the nonrefundable $500 credit for dependents who are not children, the inability to deduct investment fees, the 60 percent deduction limit for charitable donations, the reduction of deductible mortgage interest on mortgage loans of $1 million or less to $750,000 or less and not including home equity loans and credit lines, the expansion of 529 college savings plans to include private K to 12 education expenses, and the deduction of state and local property and income tax, now capped at $10,000.
Although many tax provisions are designed to adjust each year to account for inflation, this is not the case for the state and local tax deduction cap or for the child tax credit. This means the value of these tax breaks will be less each year. For example, if the tax deduction cap of $10,000 were adjusted for inflation at the rate of 2 percent per year, it would equal $11,700 in 2025, but as things stand, it will remain at $10,000.
According to the Tax Policy Center, more than 80 percent of taxpayers will see reduced 2018 taxes as a result of these changes. However, 42.5 percent of these cuts will be enjoyed by the top 5 percent of taxpayers: those who earn at least $307,900 annually.
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