Fiscal Cliff Bill - Tax Implications

Posted by Andy
Congress has passed a bill extending most of the 2012 tax code into the future for most Americans.  Those earnings more than 400,000 will see tax increases.  This bill kept the tax rates and many credits, including the  tuition and child tax credits, the same for the future.  Personally I am excited to see a permanent fix to the AMT.  This is an annoyance each year that Congress has to fix and it finally has been given a long term solution.

Note that the 2% payroll tax cut that we have enjoyed the last two years was not extended, so all workers will see a tax increase with your first 2013 paycheck.  It could have been much worse I guess.

Details of the tax bill:

  • Raises the top marginal rate to 39.6% for single filers with taxable income over $400,000 and joint filers over $450,000.
  • Raises the capital gain rate to 20% for taxpayers subject to the 39.6% rate, but retains the 15% top rate for other taxpayers.
  • Permanently “patches” the alternative minimum tax retroactive to 2012.
  • Permanently extends the $5 million estate tax extension, including the transfer of the unused exemption of a deceased spouse, but increases the estate tax rate to 40% (from 35%)
  • Re-enacts the phase-outs of personal exemptions and itemized deductions for taxpayers with AGIs exceeding $250,000 (single filers) or $300,000 (joint filers), providing a hidden and dishonest rate increase for taxpayers under the $400,000/$450,000 thresholds.
  • Extends 50% bonus depreciation and the $125,000 Section 179 deduction limit through 2013.
  • The special exclusion for income from cancellation of qualified mortgage debt (through 2013)
  • The optional deduction for state and local sales taxes (through 2013)
  • The exclusion from income of IRA donations to charity (through 2013).  This one allows a “do-over” for IRA distributions received in December 2012, if they are transferred to charity before February 2013.
  • Educator expenses above-the-line deduction
  • Private mortgage insurance (PMI) itemized deduction
  • Tuition and fees above-the-line deduction
  •  Many tax credits were extended for five years, including the American Opportunity Credit, the Earned Income Credit, and the child tax credit (at a higher level than in the past).
  • The adoption credit was also permanently extended at a much higher rate than it was planned to drop to.  The amount is still uncertain but will be at least 10,000 and is indexed to inflation  Source

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