At the beginning of 2013, President Obama signed the American Taxpayer Relief Act of 2012, averting the dreaded “fiscal cliff” and making significant changes to U.S. tax law.
While the top 1 percent of taxpayers will bear the biggest burden, the new law will affect most U.S. families in one way or another.
Income Tax Brackets
Rates will increase for only the highest income tax bracket, increasing from 35 percent to 39.6 percent. These changes apply only to individuals with at least $400,000 of taxable income, or couples filing jointly with at least $450,000.
In 2011 and 2012, to stimulate the economy and help the middle class, the employee portion of the Social Security tax was reduced by 2 percentage points. Congress allowed this cut to expire and the rate to return to 6.2 percent, so individuals will owe up to $2,425 more in payroll tax in 2013. The threshold for maximum wages taxed by the Social Security tax is $113,700 in 2013.
In addition, there will be a 0.9 percent payroll Medicare tax surcharge starting in 2013 as part of the Affordable Care Act. This applies to individuals earning more than $200,000 and couples filing jointly earning more than $250,000.
The personal exemption is the amount of money a taxpayer can deduct for him or herself and for dependents. In 2013, this exemption is expected to be $3,900.
However, the exemption now begins to phase out for individuals earning more than $250,000 and couples earning more than $300,000. It vanishes completely for individuals earning $372,500 of adjusted gross income, or income before itemized deductions, and for couples at $422,500.
Limit on Itemized deductions
The “Pease” limitation is a complex limitation on all itemized deductions, including charitable donations and mortgage interest, which will eliminate up to 80 percent of deductions for taxpayers above the threshold of $250,000 for individuals and $300,000 for couples. This phase-out effectively adds about 1 percentage point to the top tax rate, including the top rate on capital gains.
Under the new law, dividends are not taxed at the same rate as ordinary income. Instead, they are considered (along with capital gains) long-term gains. Taxpayers in the 25 percent, 28 percent, 33 percent and 35 percent income-tax brackets will continue to be taxed at 15 percent. Those in the 10 percent and 15 percent brackets will continue to pay no taxes on capital gains and dividends.
However, the new law permanently raises rates on long-terms gains for top-bracket taxpayers. People with enough income to pay tax at 39.6 percent will now owe 20 percent on their net long-term gains.
In addition, the Affordable Care Act levies a new 3.8 percent tax on net investment income above a threshold of $200,000 for singles and $250,000 for couples.
Alternative Minimum Tax
The new law indexes for inflation the Alternative Minimum Tax, preventing nearly 30 million taxpayers from being hit with bills averaging almost $3,000.
Tax law can be complicated, so if you have questions, your best bet is to consult a tax lawyer.