Federal Tax Update
In the early morning hours of Jan. 1, 2013, following several months of heated debate about the fiscal cliff, the Senate passed the 2012 Taxpayer Relief Act. President Obama signed it into law on Jan. 2. The 2012 Taxpayer Relief Act preserves the Bush era tax cuts for most Americans but increases income and capital gains taxes for high income individuals. Highlights of the new legislation include:
- An increase in the Social Security payroll tax rate from 4.2% to 6.2%.
- An increase in income tax rates for high income taxpayers – individuals earning more than $400,000 and couples earning more than $450,000 will now be subject to income tax at a rate of 39.6% (up from 35%) on earnings in excess of the $400,000 and $450,000 levels.
- An increase in capital gains and dividends tax for high income taxpayers – individuals in the 39.6% income tax bracket will now pay 20% (rather than the old 15% rate) on capital gains and dividends.
- Phaseouts on itemized deductions and personal exemptions – individuals making more than $250,000 and couples making more than $300,000 will lose a larger percentage of their itemized deductions and personal exemptions.
- Permanent alternative minimum tax (AMT) relief – new exemption amounts (for tax years beginning in 2012) are $78,750 for joint filers and $50,000 for individuals. Beginning in 2013, these amounts will be indexed for inflation.
- A reinstatement of the $5 million estate, gift and generation-skipping exemptions (indexed for inflation) and a reinstatement of portability, which allows a surviving spouse to use his or her deceased spouse’s unused federal estate tax exemption.
- An increase in the top estate and gift tax rate from 35% to 40%.