A Brief Summary of the New Tax Plan

A Brief Summary of the New Tax Plan

Congress voted to approve a compromise tax plan at the very last minute – actually beyond the very last minute – in an all too rare showing of bipartisanship to keep the country from falling off the so-called ‘fiscal cliff.’   It is important to note that the economic challenges that the U.S. faces have only been partially addressed through this legislation.  A decision on spending cuts necessary to bring down our mounting federal debt was postponed for two months.  Nonetheless, we can glean some hope that our politicians will be able to start compromising on the even tougher issues that they will be expected to tackle in 2013.

Here is a brief summary of the tax changes.

  • The income tax rate increases from 35% to 39.6% for taxpayers earning more than $400,000 (individuals) or $450,000 (married filing jointly).
  • The long-term capital gains tax rate increases from 15% to 23.8% (including the Affordable Health Care Act 3.8% surcharge) for the same high-income taxpayers above.
  • The phase-out for personal exemptions and itemized deductions will be set at $250,000 for singles and $300,000 for joint filers.
  • The AMT exemption amount changes to $50,600 (individuals) and $78,750 (MFJ) for the 2012 tax year and will automatically adjust for inflation moving forward.  This latter fix addresses a long-running problem with the AMT, namely its stealthily increasing impact on the middle class which was never the intent of the original law.
  • The payroll tax rate increases from 4.2% to 6.2% for all wage earners.  This is actually not a tax increase but rather the expiration of a temporary tax decrease.
  • The estate and gift tax exclusion amount remains at $5 million (thousands of estate planning attorneys will be breathing a sigh of relief over this one).  The top rate for estates above that amount changes to 40%.

The new law also maintains a number of tax credits that overwhelmingly benefit the middle class.

  • The Child Tax Credit, up to $1,000 for each qualifying child under the age of 17 at the end of 2012 (see IRS Publication 972).
  • The Child and Dependent Care Credit for paying someone to care for a dependent under age 13 so that you can work or look for a job.  Benefits will be reduced significantly next year (see IRS Publication 503).
  • The Earned Income Tax Credit, a refundable credit for married couples filing jointly with 2012 earned income under $50,270 and singles who made less than $45,060.  Next year, both phase-out limits and credit amounts will revert back to lower levels (see IRS Publication 596).
  • The American Opportunity Tax Credit for higher education expenses.  It will now be available to a broader range of taxpayers, including many with higher incomes and those who owe no tax.  The full maximum annual credit of $2,500 per student is available to taxpayers whose AGI is less than $80,000 (single) or $160,000 (MFJ).

Also included are a continuation of the extension of unemployment benefits, an extension of the current Medicare reimbursement rates to doctors, and various business tax credits.  Although the Tax Policy Center reports that the heaviest burden will fall on the top 1 percent of taxpayers, the expiration of the payroll tax cut will actually raise taxes on 77% of U.S. households.  Happy New Year!

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