With Congress in gridlock last December, all eyes were on our congressional leaders as Wall Street and the nation were wondering, hoping, that a fiscal deal could be struck before the end of the year in order to avert a "fiscal cliff." And like Congress has done in the past, the House and Senate squeaked out a deal at the last possible moment on December 31st, which was then officially signed into law on January 1st, 2013. So what does this mean for your taxes?
Here are some key tax changes included in the new legislation, now called the American Taxpayer Relief Act of 2012 (Act).
Income Tax Rates
Beginning January 1, 2013 a top tax rate of 39.6% will apply to single taxpayers making more than $400,000 a year and married joint filers making more than $450,000 a year.
Federal tax rates will largely remain the same for those making less than those amounts (tax brackets were adjusted for inflation).
Social Security Payroll Tax
The temporary 2-percentage-point reduction of the Social Security Payroll Tax in 2011 and 2012 expired, pushing the rate back up to 6.2% from 4.2%. This means that almost every single wage earner will pay more in taxes and see less on their paycheck.
Permanent Patch to AMT
AMT will now be indexed annually for inflation, retroactive to 2012. When the Alternative Minimum Tax was first levied, the exemption amount wasn’t indexed to inflation. Over the years, congress has been making temporary patches to the AMT to adjust for inflation. The new Act sets the AMT exemption amount to $50,000 for single filers and $78,750 for joint filers for tax year 2012; and going forward, it is automatically indexed for inflation.
Dividends and Capital Gains
For taxpayers in the top tax bracket (single filers making more than $400,000 and joint filers making more than $450,000), the capital gains rate was increased from 15% to 20%. The capital gains tax rates will remain unchanged for filers in the lower brackets.
Pease Itemized Deductions and Personal Exemption Phase-outs
The Pease itemized deduction phase-out and the personal exemption phase-out (PEP) was reinstated, but with changes to the AGI thresholds - $250,000 for single filers and $300,000 for joint filers (indexed for inflation).
The estate tax exclusion is now set permanently at $5 million, $10 million for married couples through the portability provision, and is indexed for inflation. However, the estate tax rate was raised from a top rate of 35% to 40%.
Personal Tax Credits
The following are extended through the 2017 tax year:
- $1,000 Child Tax Credit;
- Expanded American Opportunity Tax Credit; and
- The expanded Earned Income Tax Credit.
Other Personal Deductions and Exclusions
The following are extended through 2013:
- Deduction for mortgage insurance premiums;
- Deduction for state and local taxes;
- Home sale gain exclusion of $250,000 for single taxpayers and $500,000 for married joint filers (on qualified sales);
- Charitable IRA Rollover/Qualified Charitable Distribution;
- Above-the-line deduction for tuition; and
- $250 above-the-line teacher deduction.
- The Research Credit, the production tax credits, and others are extended through 2013;
- 15-year depreciation and Section 179 expensing allowed on qualified real property through 2013;
- Work Opportunity Credit extended through 2013,
- Bonus depreciation extended through 2013; and
- The Section 179 deduction limitation is $500,000 for 2012 and 2013.
Sources: Spidell Publishing Inc., IRS.gov, Bankrate.com