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American Taxpayer Relief 2012 Part I

January 20, 2013

Although Congress averted many of the potential consequences of the tumble over the fiscal cliff, in Part I of this article, we are highlighting some key provisions of the law for individual taxpayers (Part II will discuss businesses):

A tax increase in 2013 for the highest income earners with a marginal rate of 39.6% in effect for taxpayers earning over $400,000 ($450,000 for married taxpayers filing jointly).  All other rates remain the same.

Higher capital gains tax rates for top earners - the same taxpayers impacted by the 39.6% marginal rate now face a 20% rate on capital gains and dividends.

Personal exemption and itemized deduction phase-out levels have been raised to $300,000 for married couples and surviving spouses and $250,000 for individual taxpayers.

Alternative Minimum Tax inflation indexing is now permanent after years of annual patches.  For 2012, the exemption is $50,600 for individuals and $78,750 for married taxpayers filing jointly.

Restoration of the full rate for social security and Medicare tax withholding means that the "payroll tax holiday" is over and the 2% break received by employees' portion of social security withholding for recent years is gone.  The rate for social security withholding is back to 6.2% on income up to $113,700 for 2013.

Estate and Gift tax matters were clarified with the inflation-adjusted exemption maintained at $5.12 million (2012) althought the top tax rate did jump to 40% as of January 1, 2013.

Several other matters were addressed including retaining the Marriage Penalty Relief, extending many Education Tax Benefits, conversions to Roth Retirement Plans allowance for participants in employer-sponsored 401(k) plans and tax relief for certain Mortgage Loan Modifications.

Finally, taxpayers with net investment income also face a 3.8% surtax on categories of certain unearned income - this was already slated to go into effect as a result of health care reform.

If you have any questions or wish to discuss how any of the above will impact your tax situation, please contact our office for assistance.

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