Fiscal Cliff Agreement HighlightsThe latest legislation raises income-tax rates for the first time in almost two decades. It permanently codifies most of the tax rates that were set only temporarily in the Bush era. Here are the highlights:
Whose taxes are increasing?
Social Security withholding for employees goes back up to 6.2% (12.4% for employers or self-employed individuals) from 4.2% on earnings up to $113,700 in 2013. The average household earning $50,000 will pay an extra $1,000 in taxes in 2013 as a result. Those earning $113,700 will pay an additional $2,274 this year. This tax increase is expected to affect 77% of households, according to the nonpartisan Tax Policy Center.
What about capital gains?
For couples with incomes over $450,000 or individuals with incomes exceeding $400,000, capital gains and dividend taxes increase to 20% from 15%. The Affordable Care Act adds another 3.8% to the capital gains rate for these individuals. This change is permanent.
What are the phase outs?
Americans earning more than $250,000 (single) or $300,000 (married filing jointly) will be seeing the personal exemption phasing out at these levels. Additionally, 80% of itemized deductions for wealthy taxpayers, including charitable donations, state/local taxes paid, and mortgage interest, are phased out because the taxpayers’ incomes are deemed too high.
Is there news on tax credits?
The child tax credit, the child and dependent care tax credit, the earned income tax credit and the American opportunity tax credit have all been revised. Certain business tax credits have also been extended, including the 50% bonus depreciation rules that apply to a wide variety of property and equipment, excluding real property.
What about donating IRA assets to charities?
Taxpayers who are at least 70 ½ may donate $100,000 of IRA assets to a charity; this extension has been extended for at least two years.
How about the Alternative Minimum Tax (AMT)?
Congress created a permanent and retroactive inflation “patch” to the AMT. The “middle class” can breathe a sigh of relief.
What about gift and estate taxes?
The maximum rate goes up to 40%. The exemption is about $5 million and will be indexed for inflation. Congress made this change permanent.
Are Roth Conversions OK?
Yes, clients may convert an employer-sponsored qualified plan (401K and others) to a Roth IRA.
What are the new tax brackets?
They are 10%, 15%, 25%, 28%, 35%, and 39.6%.
Also included in the bill, unemployment benefits have been extended for another twelve months, Congressional pay raises have been blocked, certain farm programs have been extended to avoid a hike in milk prices, and Medicare reimbursements to doctors are extended at current rates for one year.