On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (the Act), effective as of January 1, 2013. In general, the Act made permanent for most taxpayers the tax rate cuts first enacted under President Bush in 2001 and 2003, and extended certain expiring temporary individual and business tax cuts through 2013. Below are our “fiscal cliff notes” of some of the significant provisions of the Act.
-- Maintaining current tax rates – The Act maintained current income tax rates for all taxpayers other than “high-income taxpayers”:
- The highest marginal tax rate for “high-income taxpayers” has increased from 35% to 39.6%, and the rate of tax on qualified dividends and capital gains of such taxpayers is increased from 15% to 20% (in addition to the potential 3.8% net investment income tax levied under the Patient Protection and Affordable Care Act). The taxable income threshold for high-income taxpayers is $450,000 for married taxpayers who file jointly and $400,000 for single taxpayers. Although tax rates will remain the same for taxpayers who earn less than these amounts, personal exemptions and itemized deductions will be limited for married taxpayers filing jointly with adjusted gross incomes greater than $300,000, and single taxpayers with adjusted gross incomes greater than $250,000. The IRS has released updated withholding guidance, which is available here.
- No Impact on Backup Withholding Rates – The backup withholding rate under Internal Revenue Code (IRC) § 3406, which is keyed to the marginal tax rates on individuals, remains at 28% following the enactment of the Act.
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