With 2012 behind us, we took a very short leap off the dreaded “fiscal cliff.” It wasn’t a long jump, only a day, and we’ve emerged a little worse for wear (even though it was probably because we were sick of hearing about it). I know I’m sick of hearing about it. But we finally have an agreement and it’s called the American Taxpayer Relief Act of 2012.
- The tax cuts were extended – permanently – for all but those at the top. For this purpose, the top means $400,000 for individual filers and $450,000 for married couples. The top tax rate will increase to 39.6% from 35%.
- The Pease and PEP (personal exemption phaseout) restrictions on limitations were also extended. The applicable thresholds for the caps are $250,000 for individual filers and $300,000 for married couples.
- Capital gains tax rates and dividend tax rates stay low for most taxpayers. Taxes on capital gains and dividends will increase to 20% for taxpayers at the top.
- The alternative minimum tax (AMT) will be permanently adjusted for inflation. This is a good thing.
- Also extended for five years (not permanently) are a number of individual tax credits including the child tax credit, the earned income tax credit (EITC), and the American Opportunity Tax credit (a version of the Hope Credit).
- On the deduction side, a couple of above the line deductions were extended, including the deduction for school teacher’s expenses and the tuition and fees deduction. On the itemized deduction side, the option to deduct state and local sales taxes in place of state and local income taxes was extended for a year.
- The federal estate tax exemption remains at $5.12 million (indexed for inflation). The top tax rate will be 40%, higher than the current rate of 35% but lower than what would have happened under the lapse.
Payroll tax changes for 2013: The payroll tax cuts that just expired took effect in 2011. Those cuts were originally supposed to be temporary one year cuts in withholding to make up for the loss of the Making Work Pay Credit. The Making Work Pay Credit was authorized under the American Recovery and Reinvestment Act of 2009 and was expected to be a temporary cut (remember, that’s where your taxes on your tax return were reduced by $400 for individual taxpayers or $800 for married couples). With the payroll tax cut, payroll tax contributions on the employee side were reduced by 2%; instead of paying in at 6.2% for Social Security taxes, contributions were 4.2%. As earnings increased, so did the savings.
The IRS announced that they will not accept any tax returns prior to January 30. Due to the late filing date, refunds will also be delayed. Also, some forms will not be ready until the end of February to the beginning of March. This includes the Residential Energy Credit and Depreciation.
Standard mileage rates. For 2012, the standard mileage rates are as follows: 55 ½ cents for business, 23 cents for medical and moving, 14 cents for charity. Except for charity, other rates increased by 1 cent for 2013.