Wednesday, January 2, 2013

Details of New Tax Bill

Payroll Taxes Increase by 2%: For millions of wage earners, the most immediate effect would be the lapse of a 2% payroll-tax cut that was part of a deal President Barack Obama struck with Republicans late in 2010. It lowered to 4.2% from 6.2% the employee portion of the Social Security tax, allowing workers to keep more take-home pay. For an individual earning the maximum 2013 cap of $113,700 or more, the increase would be nearly $200 per month. Overall, the expiration of this stimulus would cost working Americans $125 billion a year. It will take up to four weeks for many workers to know exactly what their 2013 take-home pay will be, according to Michael O'Toole, an official of the American Payroll Association.

Income Tax Rates: The top rate on ordinary income for joint filers earning more than $450,000 ($400,000 for single filers) will rise to 39.6% from 35%. Left unclear is whether the $450,000/$400,000 threshold refers to adjusted gross income (AGI) or taxable income. AGI doesn't include subtractions for itemized deductions, while taxable income does. Current law would be permanently extended for income earned below the $450,000/$400,000 level.

Capital Gains & Dividends: For joint filers with income above $450,000 ($400,000 single), the top rate on long-term capital gains and dividends would rise to 20% from 15%. For taxpayers earning less than the thresholds, there would be a permanent 15% top rate on long-term capital gains and dividends, except perhaps for the lowest-bracket taxpayers, who currently have a zero rate.

Alternative Minimum Tax: The bill permanently and retroactively adjusts AMT to stop it impacting more taxpayers than designed. The current fix expired at the beginning of 2012.

Limits on Itemized Deductions & Personal Exemptions: Starting at $250,000 of income for individuals and $300,000 for married couples there will be a limit on itemized deductions and allowed exemptions.

Estate and Gift Tax: The estate and gift tax exemption would remain $5 million or more per individual vs. the $3.5 million sought by President Obama. But the current 35% top tax rate on amounts above the exemption would increase to 40%.

Other Good Stuff: Several provisions that lapsed either at the beginning or the end of 2012 will be back. Among these provisions are deductions for $250 of teachers' classroom expenses; state sales taxes in lieu of state income taxes; tuition and related expenses; and the direct charitable contribution of up to $100,000 of IRA assets for people 70½ and older. The deal would also extend for five years the American Opportunity Tax Credit; for many taxpayers this dollar-for-dollar credit is worth up to $2,500 and therefore the most valuable education benefit. And it would extend for five years the current versions of the Child Tax Credit and Earned Income Tax Credit.

Business Owners: A one-year extension of current "bonus" depreciation rules, which allow businesses to deduct up to 50% of the cost of a wide variety of property and equipment, excluding real estate.

For more 2013 Tax and Financial Planning go to