On Jan. 2, with the nation on the edge of the “fiscal cliff” (a combination of Bush-era tax cuts expiring and the imposition of scheduled spending cuts), President Barack Obama signed the American Taxpayer Relief Act. Although it helped to quell the “fiscal cliff” fears temporarily, it is only the beginning of the national debate over revenue and spending.
Although the act does increase taxes on high-earners and trusts, individual taxpayers will be most affected by many provision of the Act. These provisions are “permanent,” in that they are not automatically scheduled to expire. Let’s take a quick look at some of them…
- Extend income tax relief for taxpayers below $400k (or $450k for married filing jointly).
- Taxpayers with income above this level will now be faced with a top marginal rate of 39.6 percent. This is higher than the $200-250k originally proposed by the president, but lower than the $1 million put forth by many members of Congress.
- Long-term capital gains and qualified dividend rates. The rates for LTCG and dividends will go up to 20% for taxpayers above the $400-450k threshold. However, they will now also be subject to a 3.8% Medicare surtax, making the new rate effectively 23.8%.
- Personal exemption phase-out. The personal exemption phase-out is reinstituted for taxpayers with adjusted gross income above $250k (single) or $300k (married filing jointly).
- Estate, Gift and Generation-Skipping Transfer (GST) taxes. The new rate for these three taxes will be 40 percent. This is higher than last year’s rate of 35 percent, but lower than the rate that was set to take effect of 55 percent. The tax exemptions for these taxes are all the same and are indexed for inflation. The 2013 exemption is expected to be $5.25 million. The act continues to allow surviving spouses to utilize their deceased spouse’s unused estate and gift tax exemptions, under the principle of “portability.”
- State Death Taxes and the Payroll Tax. Finally, the act did not extend the Payroll Tax cut of 2 percent, and it also replaced the scheduled estate tax credit with a deduction for state estate taxes paid.
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