Now that Congress Has Averted the Fiscal Cliff, What Does it Mean for Me?
A. It depends on your income.
Here are some of the basic provisions of the American Taxpayer Relief Act, which was agreed to by Congress on January 1, 2013:
- It restores the 39.6% rate for high-income households (from 35% for 2012). This top rate applies to singles with incomes of more than $400,000 and married couples with incomes above $450,000.
- The top capital gains and qualified dividend tax rates increase to 20% (from 15% for 2012). These 20% tax rates will apply to single taxpayers with incomes of more than $400,000 and couples with incomes of more than $450,000. With the 3.8% surcharge from the Affordable Care Act, dividends and capital gains would be taxed at a rate of 23.8% for high-income households.
- The law reduces tax benefits for households making more than $250,000 (for singles) and $300,000 (for couples). The agreement reinstates limits on high-income tax benefits, the phaseout of itemized deductions and the personal exemption phaseout, for couples with incomes over $300,000 and singles with incomes over $250,000. These two provisions reduce tax benefits for high-income households.
- It raises tax rates on the wealthiest estates. For estates of individuals who die in 2013, the federal estate and gift tax exemption remains $5.25 million (up from $5.12 million in 2012). The estate tax rate on the taxable value of an estate in excess of the exemption increases to 40% (up from 35% for 2012).
Important: The American Taxpayer Relief Act did not continue the so-called "payroll tax holiday." It is over. That means for 2013, taxes on the OASDI (Old Age, Survivors and Disability Income) portion of FICA will rise by 2 percentage points on all workers.
However, the law did extend several tax provisions that had expired, such as the research tax credit and the American Opportunity tax credit for higher education. It also provided an alternative minimum tax "patch" so that not as many middle class taxpayers will be hit with the AMT. For tax years beginning in 2013, the law increases the AMT exemption amounts to $51,900 for single taxpayers, $80,800 for married joint filers and $40,400 for married individuals filing separately. These amounts will be adjusted to increase for inflation after 2013 (up from $50,600 and $78,750 and $39,375 respectively in 2012).
These are just some of the provisions of the law. We will add more complete coverage soon.