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Fiscal Cliff Averted: Summary of changes resulting from the American Taxpayer Relief Act of 2012

The American Taxpayer Relief Act of 2012 was passed by both The Senate and Congress on January 1st, thus averting the now infamous “Fiscal Cliff,” which would have caused major tax hikes to take place as well as many favorable tax breaks to expire.

Here are some of the highlights of the Act:

  • Individual Income Tax Rates:  For the years beginning after 2012, a new 39.6% rate will apply to individuals with income above $400,000 for single filers, $450,000 for married taxpayer filing jointly, $425,000 for heads of household and $225,000 for married individuals filing separately.  All other rates have been extended permanently.

  • Capital Gains and Qualified Dividend Income Rates:  For tax years beginning after 2012 long-term capital gain and qualified dividend tax rates will permanently rise to 20% for taxpayers whose income exceeds $400,000 ($450,000 for married taxpayers filing jointly). Taxpayers under those income thresholds will continue to be subject to a 15% tax rate on that income.  If the additional 3.8% surtax on investment income for higher-income taxpayers is also taken into account, the overall rate for those taxpayers will be 23.8%.  

  • Personal Exemption Phase-out:  This has been reinstated for tax years beginning after 2012 for taxpayers meeting the following income threshold: $300,000 for joint filers; $275,000 for heads of household; $250,000 for single taxpayers and $150,000 for married taxpayers filing separately.  This phase-out reduces the value of a taxpayer’s personal exemption by 2% for each $2,500 by which the taxpayer’s income exceeds the threshold.

  • Itemized Deduction Limitation:  This has been reinstated for high-earners. The threshold for the limitation is $300,000 for joint filers; $275,000 for heads of household; $250,000 for single taxpayers; and $150,000 for married taxpayers filing separately.  This limitation reduces a higher-income taxpayer’s itemized deductions by up to 20%.

  • AMT Exemption Patch:  Retroactively effective for tax years beginning after 2011, the AMT exemption amounts are permanently increased to $50,600 for single taxpayers, $78,850 for married taxpayers filing jointly and $39,375 for married taxpayers filing separately.  These amounts will be indexed for inflation for subsequent years.

  • Estate, Gift and Generation-Skipping Transfer Taxes:  The Act has permanently kept the exemption level at $5,000,000 (and indexed for inflation). However, it also permanently increases the top estate, gift, and GST rate from 35% to 40%.

  • Social Security: The 2% reduction in the employee-portion of Social Security tax will be allowed to expire, resulting in employee’s paying Social Security tax at a rate of 6.2% for 2013 and beyond.

Various other credits have been extended:  Several other tax credits, including the American Opportunity tax credit, have been extended for five years.

These are only highlights of the new legislation. Please stay tuned to our upcoming blog postings, as we will be discussing the contents of the American Taxpayer Relief Act in more detail.

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