Phew! We were able to avert the fiscal cliff. For the most part. Here is a brief summary of that 13th-hour legislation (the “American Taxpayer Relief Act of 2012” or the “Act”):
What the Act does:
1. Brings back the Clinton-era 39.6% tax bracket for single taxpayers with income over $400,000 and married filing jointly taxpayers with income over $450,000.
2. Creates a permanent unified $5 million estate tax exemption and $5 million lifetime gift tax exemption. It also sets maximum Federal estate and gift tax rates at 40%.
3. Extends the preferential tax rates for long-term capital gains and qualified dividends for taxpayers in the lower tax brackets:
a. The 0% tax rate will continue to apply to capital gains and qualified dividends realized by taxpayers in the 10% tax bracket.
b. The 15% tax rate will continue to apply to capital gains and qualified dividends realized by taxpayers in the 15% to 35% tax brackets.
4. Makes the Alternative Minimum Tax “patch” permanent. In 2013, the AMT exemption amounts will be $51,900 for single taxpayers and $80,800 for married filing jointly taxpayers.
5. Extends Marriage Tax Penalty relief, as well as several tax credits, including the Child Tax Credit, the Earned Income Credit and certain education credits.
6. Extends the enhanced Section 179 expensing and bonus depreciation for new equipment purchases made by small businesses. The Section 179 expense limit for 2013 is $500,000 with a $2 million investment limit.
What the Act does NOT do:
1. Does not extend the preferential tax rates for long-term capital gains and qualified dividends for taxpayers in the 39.6% tax bracket. Those taxpayers will now be subject to a 20% tax on such income.
2. Does not extend the payroll tax holiday that reduced Social Security tax from 6.2% to 4.2% (on wages and self-employment income up to $113,700 for 2013; increased each year for inflation).
3. Does not significantly affect “ObamaCare,” although certain provisions have been amended by the Act. Under ObamaCare, a Medicare surtax of 3.8% will be imposed on certain unearned income (including interest, dividends, and capital gains) realized by taxpayers with adjusted gross income above $200,000 ($250,000 for married filing jointly). In addition, a Medicare surtax of 0.9% will be imposed on wages in excess of $200,000 ($250,000 for married filing jointly).
4. Does not address the Federal Debt Ceiling, which is the Federal government’s authorized borrowing limit, as set by Congress. On December 31, 2012, the $16.4 trillion (with a “t”!) ceiling was reached.
Aside from the above, which is intended as only a high-level summary, the Act also extends about two dozen business tax credits and another dozen or so energy tax credits.