The fiscal deal that Congress created was ostensibly the saving grace for the nation, allowing the bulk of Americans to be spared from the biggest tax increases that would have gone into effect in 2013, but it didn’t avoid the second largest tax increase. So, exactly how does the new fiscal deal affect us? Below is a summary of the key provisions of the American Relief Act of 2012:
- Tax rates. The good news is that for most Americans, the tax rates will remain the same. The 10%, 15%, 25%, 28%, 33% and 35% tax brackets have been made permanent. There will be a new 39.6% rate, which will begin at the following thresholds: $400,000 (single), $425,000 (head of household), $450,000 (joint filers and qualifying widowers), and $225,000 (married filing separately). These dollar amounts will be inflation-adjusted for tax years after 2013.
- Goodbye payroll tax cut. The temporary 2% Social Security, Payroll tax cut was allowed to expire at the end of 2012. The bottom line: even if you’re not wealthy, your take home will fall by 2%.
- Estate tax. Fortunately, it’s better time to die. By permanently keeping the exemption level at $5,000,000, indexed for inflation, approximately $5,250,000 for 2013, the new law prevented the carnage that would have occurred in the estate, gift, and generation transfer (GST) tax regime. The new law permanently increased the top estate, gift, and GST rate from 35% to 40%. The portability rules, which were enacted in 2010 to allow the unused $5,120,000 exemption of a spouse who does not fully fund a by-pass trust on his or her death to pass to a surviving spouse, are permanent. All changes are effective for individuals dying and gifts made after 2012.
- Capital gains and qualified dividends rates. Under the new law, 0% and 15% capital gain rates are made permanent. A 20% rate is added for high-income taxpayers after 2012 Beginning in 2013, the rate will be 0% if income falls below the 25% tax bracket; 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate; and 20% if income falls in the 39.6% tax bracket.
- Personal exemption phaseout. Starting in 2013, personal exemptions will be phased out, reduced, for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers).
- Itemized deduction limitation. Starting in 2013, itemized deductions will be limited for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers).
- No more “patches”, permanent AMT relief. Under the new law, for tax years beginning in 2012, the AMT exemption amounts are increased to: (1) $78,750 in the case of married individuals filing a joint return and surviving spouses; (2) $50,600 in the case of unmarried individuals other than surviving spouses; and (3) $39,375 in the case of married individuals filing a separate return. These amounts will be indexed for inflation after 2012, meaning that the annual “patches” will no longer be needed.
- Tax credits for low to middle wage earners. The new law will extend the below credits for five years: (1) the American Opportunity tax credit, which provides up to $2,500 in refundable tax credits for undergraduate college education; (2) eased rules for qualifying for the refundable child credit; and (3) various earned income tax credit (EITC) changes.
- Pension provision. The new provision permits individual to convert any portion of their balance in an employer-sponsored tax-deferred retirement plan account into a designated Roth account under that plan. Unlike conversions involving Roth IRAs, once done, a conversion to a designated Roth account cannot be undone or recharacterized.
- Depreciation and Expensing. The new law extends increased expensing limitations and treatment of certain real property as Code Section 179 property. It also extends and modifies the bonus depreciation provisions with respect to property placed in service after Dec. 31, 2012, in tax years ending after that date.
The bottom line is that the Tax Code was not simplified and taxes are going up for all of us; however, compared to what could have been, the dreaded fiscal cliff, taxpayers will live to fight another day.