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Summary of 2013 “Fiscal Cliff” Tax Changes

  • Taxpayers with over $400,000 in taxable income or couples with over $450,000 in taxable income will see their maximum tax rate rise to 39.6% from 35% in 2012. For income earned below these levels, the 2012 rates are permanently extended and will remain the same.
  • The Social Security portion of payroll taxes for all employees will rise by 2%. This is the end of the so-called payroll tax holiday. The rate will return to 6.2%, a 2% rise from the stimulus rate of 4.2%
  • The personal exemption, which in 2012 was $3,800 per person, will be phased out for couples with $300,000 or more of adjusted gross income, or singles with $250,000.
  • The so-called “Pease” provision will eliminate up to 80% of deductions for couples above the $300,000 threshold, and singles above $250,000. The provision affects all deductions, including charitable donations and mortgage interest. According to many tax experts, the formula, in effect, adds about one percentage point to the top tax rate, including the top rate on capital gains.
  • Rates on long-term capital gains and dividends for top-bracket taxpayers would rise to 20% from 15%. Meanwhile, the 15% rate would continue to apply to taxpayers in the 25%, 28%, 33% and 35% income tax brackets. People in the 10% and 15% brackets would continue to have a zero rate on capital gains and dividends.
  • The bill will permanently and retroactively adjust the alternative minimum tax, originally designed to limit deductions for the highest earners, so that millions of middle-income taxpayers wouldn’t be subject to it. The current fix expired at the beginning of 2012.
  • The estate- and gift-tax exemption will remain at $5 million per individual.
  • The current 35% top tax rate on amounts above the estate and gift-tax exemption will increase to 40%.
  • Provisions allowing deductions for $250 of teachers’ classroom expenses, tuition and related expenses, and state sales taxes in lieu of state income taxes will be extended, as will the $100,000 charitable donation of IRA assets by account owners 70 1/2 and older.
  • The bill will extend for five years the American Opportunity Tax Credit. For many taxpayers this dollar-for-dollar credit is worth up to $2,500 and therefore the most valuable education benefit. It also will extend for five years the current versions of the Child Tax Credit and Earned Income Tax Credit, which are claimed by many lower-income workers making up to about $50,000.
  • The bill also includes a one-year extension of current “bonus” depreciation rules, which allow businesses to deduct up to 50% of the cost of a wide variety of property and equipment, excluding real estate.
  • Mortgage Debt Relief: A one-year extension of the Mortgage Debt Relief Act of 2007 provision that allows for taxpayers who have mortgage debt relief canceled or forgiven to have up to $2 million excluded from income.  This would expire at the end of 2013.
  • Issues concerning spending cuts and the nation’s debt ceiling were postponed for two months (March 2013)