We have all heard of the “Fiscal Cliff” and how it will affect us all. With the passage of the America Taxpayer Relief Act of 2012 the fiscal Cliff has been averted but what does this entail? We have compiled the information in this article to help you understand the many changes that may affect you and your family.
Individual Tax Facts
Tax Rates – The tax rates for years beginning after 2012 are 10%, 15%, 25%, 28%, 33% and 35% these rates are from the Bush tax cuts and will remain in place and have been made permanent. With these rates staying the same and now becoming permanent there is a new tax rate of 39.6% which begin at the following thresholds: $400,000 (single), $425,000 (head of household), $450,000 (joint filers and qualifying widow(er)s) and $225,000 (married filing separately). These dollar amounts will be adjusted for inflation for the years following 2013.
Capital Gains and Qualifies Dividend Rates – With the passage of the new law the 0% tax rate on long-term capital gains and qualified dividends will remain but it modifies at a 15% rate, and establishes a new 20% rate. For tax years beginning in 2013, the tax rate will be 0% if income falls below the 25% tax bracket; 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate; and 20% if income falls in the 39.6% tax bracket.
Personal Exemption Phase-out – For tax years beginning in 2013, personal exemptions will be phased out/reduced for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers). Taxpayers claim these personal exemptions for themselves, their spouses and their dependents.
Itemized Deduction Limitation – Itemized deductions for tax years beginning in 2013 will be limited for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers).
Alternative Minimum Tax (AMT) – The AMT tax is the excess of the tentative minimum tax over the regular rate. AMT is owed only if the tentative minimum tax is greater than the regular tax. Prior to this new law, the individual AMT exemption amounts for 2012 were to have been $33,750 (Single), $45,000 (joint filers) and $22,500 (married filing separately). This new law provides permanent alternative minimum tax (AMT) relief. Effective retroactively for tax years beginning after 2011, the new law permanently increases this exemption amount to $50,600 (single), $78,750 (joint filers) and $39,375 (married filing separately).
Tax Credits For Low To Middle Wage Earners – This new law extends for five years the following items that are part of the 2009 stimulus package and were set to expire at the end of 2012. The American Opportunity Tax Credit, which provides up to $2,500 in a refundable credit for undergraduate college education; has also eased the rules for qualifying for the refundable child credit and made various earned income tax credit (EITC) changes.
Tax Break Extenders – Many of the traditional tax extenders have been extended for two years retroactively to 2012 and to the end of 2013. Among those tax extenders are the election to take an itemized deduction for state and local general sales taxes in lieu of the deduction for state and local income taxes; the $250 above the line deduction for certain expenses of elementary and secondary school teachers and the research credit.
Payroll Tax Issues – The 2% reduction of Social Security tax on gross wages was not extended. The tax rate for Social Security is back to 6.2%. For 2013, the Social Security wage base limit increases to $113,700. Employees who make in excess of $200,000 in a calendar year there is an additional 0.09% Medicare tax on top of the already 1.45% Medicare tax. This is an employee only tax; the employer is not required to match this tax. Therefore, all wage earners will find lower paychecks beginning in 2013.
Health Care Reform Facts
Starting in 2013 Under the Patient Protector and Affordable Care Act (PPACA) taxpayers must pay a new 3.8% additional Medicare tax on net investment income. The tax only applies if certain thresholds of income exceed; $200,000 (single), $250,000 (joint filers) and $125,000 (married filing separately). The net investment income includes net gain from property held for investment, gross income from dividends, interest, royalties, annuities, rents, passive business activity and business of trading financial instruments or commodities. Sale of your principal residence with gain greater than the exclusion under IRS code section 121 is also considered to be net investment income and therefore is taxable under the 3.8% rate. Please note that the 20% top rate of Capital Gains discussed previously does not include the 3.8% tax on investment income and gain for tax years beginning after 2012. The top rate for capital gains and dividends beginning in 2013 will be 23.8% if income falls in the 39.6% tax bracket and for lower income levels it will be 0%, 15% or 18.8% respectively.
Under the Affordable Care Act it mandates that most individuals have health insurance coverage by 2014 if an individual does not maintain minimum essential health insurance each month for themselves and their dependents there will be a penalty imposed on the taxpayer. Starting in 2014 this penalty is $95 per month; in 2015 its $325 per month and for 2016 and later will be $695 per month.
Kondler and Associates, CPAs will be happy to answer any questions you may have in regards to the fiscal cliff acts and the health care reform act. Please call our office to schedule a consultation.