1.
Panorama
January 2013 VOLUME 1, ISSUE 6
Recap of the 2012 American
Taxpayer Relief Act
The American Taxpayer Relief Act (the “Act”) allows the Bush-era tax rates to
sunset after 2012 for individuals with incomes over $400,000 and families with
incomes over $450,000; permanently "patches" the alternative minimum tax
In this Issue:
(AMT); revives many now-expired tax extenders, including the research tax
credit and the American Opportunity Tax Credit; and provides for a maximum
Recap of the 2012 Ameri-
can Taxpayer Relief Act estate tax of 40 percent with a $5 million exclusion. The bill also delays the
mandatory across-the-board spending cuts known as sequestration. President
Pleasant Surprise #1 - Obama signed the bill into law on January 2, 2013.
Qualified Dividends
The primary impact is that individuals with incomes above the $450,000/
$400,000 thresholds will pay more in taxes in 2013 because of a higher 39.6
Pleasant Surprise #2 -
AMT Permanently Patched percent income tax rate and a 20 percent maximum capital gains tax. Neverthe-
less, all taxpayers will find less in their paychecks in 2013 because of what the
Pleasant Surprise #3 - Act did not include: the new law effectively raises taxes for all wage earners
Estate Tax (and those self-employed) by not extending the 2012 payroll tax holiday that
had reduced OASDI taxes from 6.2 percent to 4.2 percent on earned income up
to the Social Security wage base ($113,700 for 2013).
Not So Pleasant Surprises -
Phase Outs/Limitations
The Act is nowhere close to the grand bargain as envisioned by the President
3.8% Medicare Surtax and many lawmakers after the November elections. Effectively, it is a stop-gap
Regulations Released measure to prevent the onus of the expiration of the Bush-era tax cuts from fal-
ling on middle income taxpayers. Congress must still address sequestration.
What Lies Ahead Congress is likely to revisit tax policy and spending cuts when it tackles the ex-
pected increase on the nation’s debt limit in February. Slowly the growth of
entitlements, such as through a ‘chained-CPI” is certain to be a controversial
topic in upcoming debates.

2.
Pleasant Surprise #1— Additionally, the Act provides for an annual infla-
tion adjustment to the exemption amounts for
Qualified Dividends
years beginning after 2012. Without this action,
Many feared that the preferential 15% tax rate on an estimated 60 million taxpayers would have
qualified dividends would revert back to the old been subject to AMT for the 2012 tax year.
classification as ordinary income, taxable at the
marginal rate of the taxpayer which now could be Although a "permanent" AMT patch is welcomed
as high as 39.6%. The Act raises the top rate for by many taxpayers, the future of the AMT itself
capital gains and dividends to 20 percent, up from could be decided later this year or next year if
the Bush-era maximum 15 percent rate. That top Congress tackles comprehensive tax reform. The
rate will apply to the extent that a taxpayer's in- AMT could, as some lawmakers have proposed, be
come exceeds the thresholds set for the 39.6 per- abolished. President Obama previously proposed
cent rate ($400,000 for single filers; $450,000 for to replace at least part of the AMT with the so-
joint filers and $425,000 for heads of households). called Buffett Rule as a part of comprehensive tax
reform. The White House has explained the Buf-
However, all other taxpayers will continue to en- fett Rule in general terms as ensuring that taxpay-
joy a capital gains and dividends tax at a maxi- ers making over $1 million annually would pay an
mum rate of 15 percent. A zero percent rate will effective tax rate of at least 30 percent. In 2012,
also continue to apply to capital gains and divi- the Senate rejected the Paying a Fair Share Act,
dends to the extent income falls below the top of which would implement the Buffett Rule. It is un-
the 15 percent income tax bracket—projected for clear if Democrats will reintroduce the bill or
2013 to be $72,500 for joint filers and $36,250 for whether it will be considered within the overall
singles. framework of possible tax reform later in 2013.
Qualified dividends for all taxpayers continue to Pleasant Surprise #3—Estate Tax
be taxed at capital gains rates, rather than ordinary
income tax rates as prior to 2003. Generally, divi- It was widely expected that estate tax rules would
dends received from a domestic corporation or a be easy prey for revenue hounds in the current
qualified foreign corporation, on which the under- “fair share” environment. When the dust settled
lying stock is held for at least 61 days within a however, the favorable 2012 estate and gift tax
specified 121-day period, are qualified dividends rules survived, except that the maximum rate for
for purposes of the reduced tax rate. Certain divi- estate, gift and GST tax was increased to 40%.
dends do not qualify for the reduced tax rates and Therefore, each individual still has a $5 million
are taxed as ordinary income. Those include (not lifetime exemption for estate, gift and GST taxes.
an exhaustive list) dividends paid by credit unions,
Many wealthy individuals rushed to make signifi-
mutual insurance companies, and farmers' coop-
cant gifts before the end of 2012 to capture their
eratives.
$5 million gift exemptions, expecting it to be only
a fond, short-lived memory. Procrastinators were
Pleasant Surprise #2—Amount therefore rewarded as a result of this unexpected
turn of events.
The Act permanently "patches" the Alternative
Minimum Tax (“AMT”) for 2012 and subsequent Perspective
years by increasing the exemption amounts and
allowing nonrefundable personal credits to the full
Strength
amount of the individual’s regular tax and AMT.

3.
It was also feared that the new rules might impose ▪ $250,000 for unmarried taxpayers; and
limitations to reduce the availability of valuation ▪ $150,000 for married taxpayers filing
discounts, change the income tax treatment of de- separately.
fective grantor trusts, and limit the amount of time Under the phaseout, the total amount of personal
that long term dynastic trusts could escape US es- exemptions that may be claimed by a taxpayer is
tate taxation. For now, those topics will remain reduced by two percent for each $2,500, or portion
thereof (two percent for each $1,250 for married
the occasional topic of discussion in Congress, but
couples filing separate returns) by which the tax-
the traditional estate planning techniques which payer's adjusted gross income exceeds the applica-
benefit from these areas survived and are still ef- ble threshold level.
fective.
Integrity
Not so Pleasant Surprises—
Phaseouts/Limitations
Innovation
Another way to raise revenue other than simply
raising the tax rate is to limit the amount of deduc-
tions a taxpayer might otherwise benefit from. Character
Before the Bush tax cuts were implemented, there
were two limitations on deductions and exemp-
tions that have now returned. 3.8% Medicare Surtax Regulations
Released
The Act officially revives the "Pease" limitation on
itemized deductions. To refresh your memory,
this limitation reduces the total amount of a The Medicare surtax became effective January 1.
higher-income taxpayer's otherwise allowable While this surtax has been lingering in the shad-
itemized deductions by three percent of the amount ows as a loosely defined concept since its passage
by which the taxpayer's adjusted gross income ex- into law at the end of 2010, the Treasury Depart-
ceeds an applicable threshold. However, the ment recently issued proposed reliance regulations
amount of itemized deductions will not be reduced on the operation of the 3.8% Medicare surtax. The
by more than 80 percent. Certain items, such as IRS explained in the preamble to the proposed regs
medical expenses, investment interest, and casu- that one of the general purposes of Code Sec. 1411
alty, theft or wagering losses, are excluded. . How- that it tries to fulfill through the proposed reliance
ever, higher "applicable threshold" levels apply regs is "to impose a tax on unearned income or in-
under the new law: vestments of certain individuals, estates, and
trusts." Despite the simplicity of this mission
▪ $300,000 for married couples and statement, defining net investment income in the
surviving spouses; proposed reliance regs requires the lion's share of
▪ $275,000 for heads of households; the 159 pages of the just-released preamble and
▪ $250,000 for unmarried taxpayers; and regs.
▪ $150,000 for married taxpayers filing
separately. If your taxable income does not exceed the 2013
threshold ($200,000 for single, $250,000 for joint
The Act also officially revives the personal exemp- returns), you are not subject to this additional in-
tion phaseout rules, but at applicable income vestment income tax. If your income exceeds the
threshold levels slightly higher than in the past: threshold, then the 3.8% tax applies to the lesser of
i) the amount your income exceeds the threshold,
▪ $300,000 for married couples and
or ii) your net investment income. This tax applies
surviving spouses;
in addition to your regular income tax under 2013
▪ $275,000 for heads of households;
rates.

4.
Leave it to the IRS to make a simple concept of cuts today, not those promised in the future
investment income extremely complicated. The as Obama urges, so they give no credit to
regs define net investment income as gross income the President’s claimed cuts. So, each side
from interest, dividends, annuities, royalties, and will continue to do their own ideological
rents, other than certain income which is derived math in terms of additional revenues and
in the ordinary course of a trade or business, net cuts they are willing to offer to reach their
gain attributable to the disposition of non-trade or respective visions of a balanced solution.
business property less deductions properly alloc-
able to such gross income or net gain. • Reaching an agreement on sequestration
Sounds simple in concept, but keep in mind it took (across-the-board spending cuts) – Recall
over 100 pages of regulations to flesh this out. that in the last debt ceiling debate in the
Bottom line, start evaluating your exposure to this summer of 2011, an agreement was
tax early in 2013, as there may be some planning reached to sequester, or reduce all pro-
you can do to soften the blow. grams across the board, by $1.2 trillion, as
of January 1, 2013. This can was kicked
Integrity down the road until March 1 under the fis-
cal cliff deal. Republicans insist on replac-
ing each dollar of across the board cuts that
Innovation are cancelled with a dollar of spending
cuts. President Obama insists on replacing
sequestration with a package that includes
equal amounts of revenue increases and
spending cuts.
What Lies Ahead? • Raising the debt limit – Speaker Boehner
intends to hold firm against raising the debt
Whatever relief that American taxpayers feel from limit unless the legislation to do so is ac-
the new legislation will only be temporary. The companied by significant spending cuts.
fiscal cliff negotiations appeared to offer a unique The “Boehner Rule” is that the debt ceiling
opportunity to achieve the “grand bargain” that we can only be raised one dollar for each dol-
all hoped for. Unfortunately, politics got the best lar in spending cuts. Hitting the debt ceil-
of the negotiations, and what we got falls terribly ing will not result in the U.S. defaulting on
short of solving the bigger problem of deficit re- its debt obligations, as there will continue
duction. to be sufficient revenues to service the na-
tional debt. What will default are some
Over the next two months, there are three signifi- Government services or programs that the
cant challenges which must be addressed by Con- existing tax revenues cannot cover.
gress and the President. Whether the ceiling is raised or not, ratings
agencies have indicated they may move to
• Reaching common ground on deficit re- lower the U.S. Government debt rating for
duction – Republicans, the Democrats, and a second time in history. You can count on
the President all claim to want balanced fear mongering by the two factions to urge
deficit reduction, but no one can agree on constituents to support their respective
how to get there. President Obama wants views.
credit for approximately $1.5 trillion in The post-election wrangling over the fiscal cliff
non-entitlement spending reductions over was just a warm up for the real show, which is the
the next decade that came out of the 2011 debt ceiling. Here, the Republicans believe they
Budget Control Act. Republicans argue have the leverage to make significant changes they
that they have produced $600 billion in desire to spending and address economic growth.
revenue increases as a result of the fiscal Whatever the outcome, Americans are likely to be
cliff deal. Republicans insist on budget even more frustrated with this exercise than with
the fiscal cliff negotiations.

5.
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Contributing to this issue: investment asset management and financial and estate
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