For the last several weeks, the media spent a great deal of time covering the fiscal cliff and the upcoming changes in the tax code. At the eleventh hour, Congress passed the American Taxpayer Relief Act of 2012 that seeks to solve some of the tax questions that have been hanging over our heads for the last several months.
While the bill has not been released in its entirety (as of the date of this article 1/2/2013), we have researched what the bill includes (and excludes). It may take a few weeks to understand every nuance of the bill, but we wanted to highlight some of the major points included. Here are the highlights:
Payroll tax Holiday has ended. The 2% payroll tax cut on Social Security that has been in effect since 2011 has ended. Therefore, the social security tax will be 6.2% of wages up to $113,700 in 2013.
Permanent Alternative Minimum Tax (AMT) Patch (retroactive to 2012). The AMT patch has been permanently adjusted for inflation. Therefore, this should end the constant discussion on whether Congress will fix AMT for any given year.
Dividend and Capital Gain Rate Increase for taxpayers with income of $400,000 ($450,000 for married taxpayers). Over that threshold, the dividend and capital gain rate will be 20% (up from 15%). The 10% and 15% rate is retained for those in the lower tax brackets.
Estate Tax Rate increase to 40% (up from 35%) on Estates over $5 Million.
Child Tax Credit of $1,000 has been extended.
American Opportunity College Tuition Credit was extended. Therefore, a tax credit of up to $2,500 can be taken for undergraduate tuition payments.
Personal Exemption and Itemized Deduction Phase-out is reinstated at a higher threshold. The phase-out will begin for taxpayers with income over $250,000 ($300,000 MFJ).
There were also a few temporary provisions that the Act extended through 2013 including:
- Deduction for Educator expenses of up to $250 for Elementary and Secondary School teachers.
- Deduction of state and local sales tax as an itemized deduction (instead of state income tax).
- Tax free distribution from IRAs for charitable purposes.
- An Above the Line Deduction for tuition payments
- Deduction of Mortgage insurance premiums treated as qualified residence interest.
This piece of legislation combined with the Health Care Act will ultimately mean that most taxpayers will see an overall increase in their taxes in 2013. As always, we will seek to update client tax plans so we can understand the full impact of the tax law changes for each of our clients.