Tax Highlights of the Fiscal Cliff Deal
As has become customary with Congress, it came down to the wire on New Year’s Eve, but a budget deal has been approved by both the House and Senate. President Obama is expected to sign the American Taxpayer Relief Act of 2012 this week. Below is a brief run through of some of the major points. In short, everyone’s taxes will be going up this year because of increased payroll tax rates, but the majority of the tax increases fall on “wealthy” taxpayers. As you’ll see in the sections below, “wealthy” taxpayers are those who make over $250,000 per year. Individuals earning over $250,000 and married couples earning over $300,000 will be subject to deduction limitations and the Medicare surtax on investment income from Obamacare, while individuals earning over $400,000 and married couples earning over $450,000 will be subject to deduction limitations, tax rate increases, and the Medicare surtax.
Income Tax Rates
Single filers with incomes over $400,000 and joint filers with incomes over $450,000 will be subject to a 39.6% tax rate (up from 35%) on any income earned above those threshold amounts. Taxpayers with incomes below those amounts will be subject to the same income tax rates as they were in 2012.
Itemized Deductions Limitations and Personal Exemption Phase-out
For single taxpayers with incomes over $250,000 and for joint filers with income over $300,000, itemized deductions will be limited and the personal exemption is phased-out. The personal exemption phase-out operates to limit the $3,900 deduction that every taxpayer is entitled to. This amount will be reduced by 2% for every $2,500 that the taxpayer’s adjusted gross income exceeds the threshold amounts listed above. For the itemized deductions limitations, also known as the “Pease” limit, the total of all itemized deductions is reduced by the lesser of 3% of the amount by which adjusted gross income exceeds those threshold amounts, or 80% of the itemized deductions that are affected by the limit.
Capital Gains Taxes
The top tax rate on capital gains and qualified dividends will go up to 20% for single taxpayers earning more than $400,000 per year and $450,000 for joint filers. The taxpayers who are subject to these higher rates on capital gains will also be subject to the health care reform 3.8% surtax on net investment income as well. Not part of this Fiscal Cliff deal, but passed as part of the Affordable Care Act (Obamacare), there is a new Medicare surtax of 3.8% on net investment income, to go along with a 0.9% Medicare tax on wages and self-employment income exceeding $250,000 for joint filers and $200,000 for individual taxpayers. The 3.8% Medicare surtax will apply to investment income, passive income, rents from real estate, and capital gains (net investment income), and will be calculated on the lesser of that net investment income or adjusted gross income.
Alternative Minimum Tax
Perhaps the best news for those of us tired of constantly waiting for Congress to patch the AMT is the addition of permanent indexing for inflation of the Alternative Minimum Tax. From now on, every taxpayer (and tax preparer!) will have a much clearer idea of whether the taxpayer will be subject to the Alternative Minimum Tax.
Payroll Taxes
The tax cut for payroll taxes for Social Security that taxpayers have been enjoying for the past couple of years was not extended, which means that taxes on all wage earners will be going up this year. The rates were at 4.2% and they will now be set at 6.2%.
Bonus Depreciation and §179 Expensing
Excellent news for small business owners is that the bonus depreciation deductions were extended into this year. On property and equipment purchases made during 2013, small businesses will be entitled to deduct 50% of the cost immediately for depreciation. The immediate deduction for property and equipment purchases under § 179 was also extended. The maximum deductible amount is $500,000, the same as it was in 2010 and 2011, and the phase-out begins at $2,000,000.
Estate Tax
Again, we get some more permanence from Congress, instead of the patchwork quilt that was the previous estate tax law. The estate and gift tax exemption amount is $5,000,000 per person, and the estate tax rate is 40%.
Miscellaneous Items
A few other tax points of the Fiscal Cliff deal:
- The Child Tax Credit, Earned Income Tax Credit, and the American Opportunity Tax Credit were all extended.
- The above the line deduction for teachers’ classroom supplies has been extended.
- The above the line deduction for tuition was extended.
- The adoption credit has been extended into 2013 as well.
- Finally, the fiscal cliff deal now allows for 401(k) plan holders to convert their plan to a Roth plan, where contributions have been taxed, but withdrawals are tax free.
If you have any questions about how the new tax laws will affect you in 2013, please contact our office!
Additionally, we will be hosting a webinar on Self-Directed IRA LLCs on January 17, 2012 at 12:00 pm. Join us by registering at the following link: https://cc.readytalk.com/r/8xz1uk7sicop
What do you think?