Introduction -

As you no doubt have heard, the U.S. was set to plunge over the “fiscal cliff” on New Year’s Day if Congress failed to act. In the early morning hours of New Year’s Day, a deal was made that averted the crisis and made permanent the majority of the Bush-era tax cuts. The President signed the American Tax Relief Act of 2012 into law on Wednesday. The following highlights the new tax changes most likely to affect our clients.

Background -

The fiscal cliff was the combination of several unrelated fiscal policy events all set to come into play on January 1, 2013. Numerous tax cuts were to expire on December 31, 2012, thereby raising taxes by $494 billion in 2013. Mandatory spending cuts of $1.2 trillion were to automatically go into effect January 3, 2013. Many worried that the double-whammy of increased taxes and spending cuts would further weaken our already injured economy.

On the income tax side, the “Bush tax cuts,” some of which have been in effect since 2001, were set to expire on December 31, 2012. The 10% tax bracket would have been eliminated, and the rate of 15% would have been the lowest rate, with the rate of 25% increasing to 28%, 28% to 31%, 33% to 36%, and 35% to 39.6%. Dividends were to revert to being taxed as ordinary income (rather than taxed at the capital gains rate of 15%), which meant that in 2013 some individuals would have had their dividends taxed at nearly three times the amount they would have been taxed in 2012.

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