Many articles have been written in the past week discussing the results of the recent “fiscal cliff” legislation. We’re going to jump in with our own article that describes a few of the many changes affecting most Americans.
Individual tax rates - Individual marginal tax rates will remain the same under this act… 10%, 15%, 25%, 28%, 33%, and 35%. An additional tax rate of 39.6% will be added and imposed on taxable income greater than $400,000 for single filers, $425,000 for head-of-household filers and $450,000 for married taxpayers filing jointly. If the spouses are filing separately, the taxable income for the highest rate would be $225,000 each. This was a huge compromise between the factions.
2% Social Security Tax Increase – This is the change that will be felt by the vast majority of Americans. Those of us who pay into the Social Security system will feel that additional 2% withholding as soon as we receive our first paycheck of 2013. It’s not a huge hit, but for someone making $50K/year, they’ll be getting about $80 less in pay each month.
Alternative minimum tax - The Alternative Minimum Tax finally has a permanent patch. The exemption amount will now be indexed for inflation so the threshold income, which triggers the AMT, will increase automatically each year. As a result, if you don’t pay the AMT this year and do not have an income increase except for inflation, you will not pay the AMT in future years. Only an actual boost in income other than for inflation might trigger the AMT. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for individuals.
Phase-out of personal exemptions - Each taxpayer is entitled to deduct a personal exemption for themselves, spouse and any dependents. The new tax law phases out higher income taxpayer’s exemptions. The phase-out begins at adjusted gross incomes of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.
Phase-out of itemized deductions - You are entitled to claim either itemized or standard deductions, whichever is largest and benefits you the most. However, under the new ruling, deductions begin phasing out at $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly. Some itemized deductions are not affected. These include medical expenses, investment income and gambling losses.
Capital gains and dividends - Capital gains and dividend rates have been increased to 20% for individuals with incomes high enough to put them in the top tax bracket of 39.6%. The existing 15% rate remains in effect for taxpayers in the middle brackets, including 25%, 28%, 33% and 35%. Taxpayers in the 0% to 15% brackets retain the 0% rate.
Estate and gift tax - Congress effectively made the system that has been in effect for the past two years permanent. The estate and gift tax exclusion amount remains at $5 million, which is indexed for inflation (thus making the amount $5.12 million in 2012). The only real change made was to increase the top tax rate from 35% to 40%, effective January 1, 2013. If no action had been taken, the exclusion amount would have dropped to $1 million, and the tax rate for most estates would have increased to 55%.
A number of other existing extensions were made permanent by Congress.
- Marriage penalty – The marriage penalty relief was permanently extended for the standard deduction, the 15% bracket and the Earned Income Tax Credit. However, married couples filing jointly with combined incomes of $450,000 or more are subject to the 39.6% tax rate instead of simply double the single threshold, which would be $800,000.
- The child and dependent care credit is permanently extended.
- The adoption credit is permanently extended but is no longer available to those who have no tax liability. Families with incomes under $150K are eligible for the full credit.
- The exclusion for employer-provided educational assistance is extended, allowing employees to exclude up to $5,250 yearly in employer-paid tuition assistance.
- A five-year limit for claiming student loan interest deductions of up to $2,500 per year for interest paid on a student loan was eliminated.
- Coverdell education savings accounts were made permanent so parents can use them to assist with expenses for children from kindergarten through high school.
- The tax credit for qualified tuition and other expenses related to higher education was extended through 2017.
There are many additional items that were affected by the legislation recently passed by Congress and signed by President Obama. We’ll try to discuss other areas of interest or go into more depth on areas we’ve only touched on here in the next several weeks.
We have also just learned that the first day the IRS will accept the filing of 2012 tax returns is January 30, 2013. However, not all forms will be available at that time. Depending upon what is required in your return, your filing may be delayed further until the appropriate form(s) become available.