In the December, 2012 edition of Tax Law Explained, I summarized some of the key tax laws that would be affected by a failure of the Federal Government to reach a new set of tax laws and avoid the so-called “fiscal cliff”.
As we now know, the world is still here (despite how some interpreted a Mayan calendar) and while we actually fell over the fiscal cliff we were saved from the clutches of disaster before we hit ground.
After much rancor and posturing, the Senate came to an agreement around 2 a.m. on Tuesday, January 1, 2013 by a vote of 89-8. The House later approved the bill by a vote of 257-167 and the President signed it into law on January 2, 2013. This new set of tax laws is officially known as the “American Taxpayer Relief Act of 2012”.
Many, but not all, of the Federal Tax laws that were set to expire at the stroke of midnight on December 31, 2012 were extended. In some cases, however, the general provisions of the law were extended but they tinkered with the fine print.
Here is a brief summary of some (but not all) of the new income tax laws; many of which are created by the American Taxpayer Relief Act of 2012:
The Individual Marginal Income Tax Brackets on Taxable Ordinary Income remain at 10%, 15%, 25%, 28%, 33%, and 35%.
However, there is a new top rate of 39.6% on Taxable Ordinary Income to the extent that it exceeds certain thresholds. Those thresholds are based upon a taxpayer’s Filing Status:
- Married Filing Jointly: $450,000.
- Married Filing Separately: $225,000.
- Single: $400,000.
- Head of Household: $425,000.
Regarding long-term capital gains and qualified dividends:
- The 0% and 15% tax rates are permanently extended for all taxpayers whose ordinary income thresholds do not push their top ordinary income tax rate to the 39.6% tax bracket.
- The top tax rate permanently increases to 20% for those taxpayers whose ordinary income thresholds do push their top ordinary income tax rate to the 39.6% tax bracket.
- The long-term capital gain tax rate for sale of collectibles remains at 28% and on unrecaptured Section 1250 gain remains at 25%.
- The American Opportunity Tax Credit was extended through 2017.
- The Earned Income Credit was extended through 2017, possibly permanently.
- The $1,000 Child Tax Credit was permanently extended.
- The Child and Dependent Care Credit was permanently extended; and with higher percentages and higher limits on qualified expenses. Beginning in 2013, taxpayers can get a tax credit of 35% (increased from 30%) of qualified expenses up to a maximum of $3,000 per child (increased from $2,400) with a $6,000 maximum for 2 or more children.
- The Marriage Penalty Relief was extended, for the time being.
- The Alternative Minimum Tax (“AMT”) exemptions were increased, retroactive to 2012 as follows:
- $50, 600 for individuals;
- $78,750 for married taxpayers filing jointly;
- $39,375 for married taxpayers filing separately.
This means that fewer taxpayers will get caught in the stealth AMT net. Even better, AMT exemptions are projected to be even higher for 2013.
- The phase-out of Personal Exemptions was reinstated meaning that certain higher income taxpayers will lose the benefits. The benefits of the Personal Exemption begin to phase-out at the rate of 2% for each $2,500 (or portion thereof) of Adjusted Gross Income (“AGI”) that exceeds the following amounts:
- Married Filing Jointly: $300,000.
- Married Filing Separately: $150,000.
- Single: $250,000.
- Head of Household: $275,000.
- The phase-out of Itemized Deductions was reinstated, albeit with more taxpayer favorable thresholds than in earlier years. The benefits of the Itemized Deductions are reduced by 3% of the amount by which a taxpayer’s AGI exceeds the same threshold amounts mentioned above relating to Personal Exemptions. The maximum phase-out is 80% of a taxpayer’s Itemized Deductions meaning that at least 20% will be preserved no matter how high one’s AGI is.
- The “above the line” deduction that teachers once got for qualified classroom expenses paid out of their own pockets is revived retroactive to 2012, and forward through 2013.
- The election that taxpayers once had for deducting sales and local tax in lieu of state and local income tax is revived retroactive to 2012, and forward through 2013.
- In 2011 and 2012 there was a temporary reduction in the employee contribution to Social Security Tax reduction (from 6.2% to 4.2%). This withholding tax break was not extended. Beginning in 2013, employee’s wages (up to $113,700) will once again be subject to the regular/full 6.2% Social Security Tax. The Employer contribution was never reduced and remains at 6.2%.
- Beginning in 2013, the Medicare Hospital Insurance tax rate on employee’s wages (and taxpayers subject to Self-Employment Tax) for certain higher income taxpayers is .9% higher. This would bring the total combined Medicare Hospital Insurance relative to certain higher income taxpayers to 3.8%. (There are more details in the December, 2012 edition of Tax Law Explained.)
- Beginning in 2013, there is a 3.8% “Unearned Income Medicare Contribution Tax” on some higher income taxpayers. (There are more details in the December, 2012 edition of Tax Law Explained.)
For the time being, we have a fixed set of tax laws for a fixed period of time. However, even tax laws whose changes are “permanent” can be changed at any time.
Copyright ©, Keith B. Baker – 2013
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