Several Tax Breaks Made Permanent

One of the most confusing and frustrating aspects of the tax code is lawmakers’ practice of making tax breaks available for a year or two – and then deciding whether or not to extend them. Thankfully, the new law makes several provisions “permanent.” This doesn’t mean that Congress will never discontinue these tax breaks but we now have some certainty that the following will stick around for a while:

1. Relatively Favorable Gift and Estate Tax Rules – For 2013 and beyond, the new law permanently installs a unified federal estate and gift tax exemption of $5 million — adjusted annually for inflation — and a 40 percent maximum tax rate (up from last year’s 35 percent rate). For 2012, the exemption amount was $5.12 million after being adjusted for inflation. For 2013, the inflation-adjusted exemption amount is expected to be approximately $5.25 million. The new law also makes permanent the right to leave your unused federal estate and gift tax exemption to your surviving spouse (the so-called “exemption portability” feature).

2. Alternative Minimum Tax Patch – It had become an annual ritual for Congress to “patch” the AMT rules to prevent millions more households from getting hit with this add-on tax. The patch consisted of allowing larger inflation-indexed AMT exemption amounts and allowing various personal tax credits to offset the AMT. Thankfully, the new law makes the patch permanent, starting with 2012. As a result, about 30 million households a year will be kept out of the AMT zone.

The new law increases AMT exemption amounts for 2012 to $50,600 for single taxpayers; $78,750 for married joint filers; and $39,375 for married taxpayers filing separately. (For 2013, these amounts are projected to be $51,900, $80,750 and $40,375, respectively.)

3. Marriage Penalty Relief – Getting married can cause a couple’s combined federal income tax bill to be higher than when they were single. The Bush tax cut legislation eased the so-called marriage penalty by tweaking the lowest two tax brackets for married couples and by giving them bigger standard deductions. These fixes were scheduled to disappear after 2012, but the new law makes them permanent.

4. Larger Child Tax Credit – The $1,000 maximum credit for each eligible under-age-17 child was made permanent. Without the new law, the maximum credit would have dropped to only $500 for 2013 and beyond. In addition, provisions that allow the child credit to be refundable for more households were extended through 2017.

5. Favorable Child and Dependent Care Tax Credit Rules – Under the Bush tax cut legislation, most working parents have been able to claim a credit of up to $600 for costs to care for one under-age-13 child, or up to $1,200 for costs to care for two or more under-age-13 kids. Lower-income parents have been able to claim larger credits of up to $1,050 and $2,100, respectively. The new law makes these credit amounts permanent for 2013 and beyond (without the new law, they would have dropped to $480 and $960 for most parents; $720 and $1,440 for lower-income parents).

6. Favorable Student Loan Interest Deduction Rules – This write-off, which can be as much as $2,500 (whether you itemize or not) was scheduled to fall under less-favorable rules in 2013 and beyond. There would have been a 60-month limit on deductible interest, and a stricter phase-out provision would have reduced or eliminated the deduction for many middle-income taxpayers. The new law permanently extends the favorable rules that have applied in recent years.

7. Favorable Coverdell Education Savings Account Rules – For 2013 and beyond, the maximum annual contribution to these federal-income-tax-free college savings accounts was scheduled to drop from $2,000 to a paltry $500, and a stricter contribution phase-out rule would have applied. The new law makes permanent the favorable rules that have applied in recent years.

8. Employer Education Assistance Plans – In recent years, employers have been able to provide up to $5,250 in annual federal-income-tax-free educational assistance payments to an eligible employee. Both undergraduate and graduate school costs could be covered and the education did not need to be job-related. This taxpayer-friendly deal was scheduled to expire at the end of 2012, but the new law makes it permanent.

9. Tax Breaks for Adoptive Parents -The Bush tax cut package included a major liberalization of the adoption tax credit and also established tax-free employer adoption assistance payments. These taxpayer-friendly provisions were scheduled to expire at the end of 2012. The credit for up to $10,000 of expenses (indexed for inflation) would have been halved and limited to special needs children only. Tax-free adoption assistance payments from employers would have disappeared. The new law permanently extends the favorable rules.