If you were like me, chances are you were wondering if it was time to don a parachute as the reality of diving off the fiscal cliff was becoming more likely to happen every day. However, Congress approved an 11th hour agreement and President Obama made it official with his signature earlier last week. So what does that mean to us? Good news and bad news.
First the bad news, everyone’s taxes went up by the 2% payroll tax holiday that expired and did not get extended to 2013. So beware as your first paycheck of the year will be less as these additional social security taxes are taken out of your pay. You will be paying 6.2% social security taxes instead of the 4.2% that you paid in 2011 and 2012, and you will pay it on all earned wages up to $113,700. This means approximately $19 a week in additional taxes will be withheld for those making around $50,000 a year. If you are self-employed this affects you also, as your rates went up from 13.2% to 15.2% for the self-employment tax on your business income.
Income tax rates also increased, but only on high income individuals. The top income tax rate went from 35% to 39.6% for those individuals making more than $400,000 and for families making more than $450,000.
The agreement also reinstates the phase out of itemized deductions and the personal exemption for individuals with income over $250,000 and couples with income over $300,000. These items reduce tax benefits, therefore increasing the taxes paid by high income people.
Regarding the alternative minimum tax (AMT), the agreement included an AMT “patch” that increased the exemption amount for 2012 from $45,000 to $78,750 for married filers and more importantly, will continuously be adjusted for inflation going forward so a “patch” will not be required each year. YEAH! This was one item that if it did not pass, would have had an immense impact – increasing the taxes for 30 million taxpayers! I am so glad they came up with a permanent fix. Well, as permanent as anything is in Washington!
Top tax rates on capital gains and dividends increased to 20% for those high income individuals, starting at the $400,000/$450,000 income level. This was considerably less than President Obama’s proposed rate of 39.6%.
More good news is that the $1,000 child tax credit and the enhanced American Opportunity Tax Credit for college tuition will be extended. These credits are extended for five years.
On the estate tax front, the inflation adjusted $5 million exemption will continue, but with an increase in the tax rates from 35% to 40% for the larger estates.
There was some good news for businesses too. The agreement keeps in place the Sec 179 and 50% bonus depreciation that allow businesses to depreciate asset purchases much quicker than normal depreciation methods. The Sec 179 election allows businesses to expense up to $500,000 of equipment purchases with the $2 million phase out. Several business credits were extended also, including the Research and Development Credit, Work Opportunity Tax Credit and other renewable energy credits.
Needless to say, after a long wait we are very glad to have some certainty related to taxes. This new tax legislation will help us to better navigate the lay of the land, and store our parachute for a while …as there is no fiscal cliff in sight.
Kathi Koenig, CPA