American Tax Relief Act of 2012

Happy New Year!

On January 1, 2013 Congress passed The American Tax Relief Act of 2012 preventing us from going over the fiscal cliff.  Yes, your taxes are going up; however the increases could have been greater.

For many taxpayers, the increased withholding from the payroll tax expiration will be significant and many will view that as a legitimate tax increase. Without the deal, taxes would have jumped an average of $3,500 per household.  Middle income families would have seen an average increase of $2,000 according to the Tax Policy Center.

In summary here are some of the ways your tax bill may change in 2013:

Payroll taxes:  The most immediate impact will be the expiration of the 2% Social Security tax cut.  In 2009 you were paying 6.2% for the Social Security tax before Congress and the White House cut the tax 2% to 4.2% for 2010 and 2011. This cut has expired and you are back to paying 6.2% as you were in 2009.

Income Taxes: Yes, taxes are going up a bit. All but the wealthiest households avoided the fiscal bullet- the expiration of the Bush-era tax cut. Predictors feared if those cuts reversed all at once it would take away billions of dollars of consumer spending and send the US economy into a recession.

The new law maintains tax rates with the exception of the top tax bracket.  The top tax bracket rate has increased from 35% to 39.6%. (Couples with income greater than $450,000 and individuals with income greater than $400,000 will pay taxes at the higher rate on the amount over the threshold.)

Capital Gains, Dividends:  Money earned from capital gains and dividends will remain at the Bush-era tax cut (0% – 15%) unless your total income is greater than the top bracket mentioned above. Taxpayers in the top tax bracket pay 20%. Taxpayers in the top bracket will be subject to a 3.8% Medicare surcharge tax on investment and unearned income.

Alternative Minimum Tax: In recent years many taxpayers have avoided the Alternative Minimum Tax because Congress applied a “patch” to the problem.  However, this year the problem was permanently fixed by the new law taking inflation into account.

Estate Taxes: The fiscal cliff was set to take a chunk out of money passed from one generation to the next. In 2012 estates of up to $5,120,000 were exempt from federal tax, and any amount over the threshold was taxed at 35%.  The fiscal cliff would have cut the threshold to $1,000,000 and raised the top rate to 55%.  The new law preserved the $5,000,000 tax free threshold and raised the rate to 40%

I would be happy to clarify any questions you may still have about the changes that have taken place.  Please feel free to contact my office at 215-258-1216 to set up a tax appointment.