Fiscal Cliff Legislation Enacted: The American Taxpayer Relief Act of 2012 Enacted

Sullivan & Cromwell LLP - January 3, 2013
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On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 (the “Act”), and the President signed the Act on January 2, 2013. The Act permanently extends the Bush era tax rates—which otherwise would have expired for all taxpayers effective January 1, 2013—for many taxpayers while increasing tax rates for individuals with taxable income above statutory thresholds. The Act increases the tax rate for ordinary income for affected individuals to 39.6% and increases the tax rate for net long-term capital gains and qualified dividend income for these taxpayers to 20%. In addition, the Act makes changes to estate and gift tax rules and extends a number of popular tax provisions that otherwise would have expired.

The Act does not affect the 0.9% increase in Federal Insurance Contributions Act (“FICA”) taxes imposed by the Patient Protection and Affordable Care Act of 2010 or the new 3.8% tax on investment income also imposed by the Patient Protection and Affordable Care Act of 2010. In addition, the Act does not extend the 2% FICA payroll holiday that expired on December 31, 2012.

The Act does not address issues related to the debt ceiling and other spending issues which are expected to be addressed by Congress later this year. As part of this process, there may be additional tax changes.