Fiscal Cliff Averted – For Now
- Published: 01/21/2013
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The fiscal cliff was the progeny of 2011’s debt ceiling debate and the Budget Control Act of 2011. The Budget Control Act was Congress’s self-imposed ultimatum to find $1.2 trillion in deficit reduction (via a bipartisan super committee) or else.
If Congress had failed to reduce the deficit, two things would have happened on January 1st 2013. First, Bush-era tax cuts would have been allowed to expire. Second, massive cuts in government spending would have automatically kicked in. On New Year’s Day, however, the fiscal cliff ultimatum was legislated from existence with the passage of H.R. 8, American Taxpayer Relief Act of 2012.
The Bad News – The Good News
What does the passage of the American Taxpayer Relief Act of 2012 mean for you and your family? The bad news: the national debt, now exceeding $145,000 for each taxpayer, will continue to grow – at least until the next, quickly approaching debt ceiling debate. The good news: most tax-paying Americans will continue to enjoy many of the deductions, exemptions, credits, and tax rates they have in recent years. Today, I’ll summarize some of the major provisions that will impact your personal income tax liability.
- Income Tax Rates: Marginal tax rates will remain the same for everyone with taxable incomes less than $400k. A new 39.6% top rate will go into effect for individuals earning taxable income over $400k and married couples earning over $450k.
- Capital Gains and Dividends: Dividends and (long-term) capital gains earned by those in the 39.6% marginal income tax bracket will be taxed at 20%. Those earned by taxpayers in lower income tax brackets will be taxed at 15% except for as follows: Dividends and capital gains will not be taxed at all for those in the 15% and lower marginal tax brackets (projected to be $72,500 for those filing jointly and $36,250 for individuals).
- Estate Tax: The estate tax is exempted on the first $5 million (indexed for inflation, so $5.12 million in 2012). Assets over the exempted amount will be taxed at 40%. Also, the estate tax portability election, allowing a surviving spouse to increase their exemption by the deceased spouse’s unused exemption, was made permanent.
- Alternative Minimum Tax (AMT): Good news for some 30 million taxpayers who anxiously wait for congress to make its annual adjustment to the AMT exemption. H.R. 8 permanently adjusts the AMT annual exclusion for inflation. This is also good news for tax pros and the IRS, since it alleviates the filing delays caused by last minute computer programming.
- Educator Expense Deductions: The $250 deduction is extended for two years.
- Deduction for Qualified Tuition-Related Expenses: Extended retroactively for 2012 and forward through 2013. The maximum deduction is $4,000 for taxpayers with AGIs of $65,000 or less, $130,000 for joint returns and $2,000 for taxpayers with an adjusted gross income above $65,000 but below $80,000 and above $130,000 but below $160,000 for joint returns.
- American Opportunities Tax Credit: Extends the 100% credit for the first $2,000 of qualified tuition and 25% for the next $2,000 through 2017.
- Qualified Principal Residence Indebtedness Exclusion: Extended through 2013 for those who have cancelled income from mortgage debt used to build, purchase or improve a primary residence.
- Mortgage Insurance Premium Deduction: Extended through 2013, qualifying taxpayers may deduct the cost of mortgage insurance on a qualified personal residence.
- State and Local Sales Tax: Taxpayers can continue to deduct state and local sales taxes instead of state and local income taxes on Schedule A through 2014.
- Energy Provisions: The credit for energy efficient appliances has been extended through 2013. Homeowners may receive a tax credit for purchasing energy-efficient clothes washers, dishwashers and refrigerators that were manufactured in the US.
- Marriage Penalty Relief: Extended are the increased standard deduction and 15% tax bracket for married couples to twice that of single filers.
- Tax Relief for Families with Children: Also permanently extended an expanded adoption credit and adoption assistance program exclusion, an expanded dependent care credit, and the $1,000 child tax credit, which allows qualifying taxpayers to reduce their income tax for each child under 17.
We’ll dive deeper into the American Taxpayer Relief Act of 2012 and its impact on businesses in the future. In the mean time, please remember that this article (or any article) should not be relied upon to make tax or financial decisions. If you have questions regarding the American Taxpayer Relief Act of 2012 or need assistance with any tax issue, please feel free to contact our office and (304) 267-2594.