Blog - Fiscal Cliff Resolution

Jessica Smith
Vice President
Director of Financial Planning

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Late Tuesday, Congress passed legislation to extend the Bush tax cuts permanently for individuals earning less than $400,000 a year or married couples earning less than $450,000.

Here are some of the most important provisions of this bill:

•Tax Rates: As mentioned above, current tax rates are extended for everyone making below $400,000 and couples making below $450,000. For those over these limits, the top tax rate increases from 35% to 39.6%.

Capital Gains and Dividends Tax: Capital gains and dividend tax rates increase from 15% to 20% for those individuals making over $400,000 and couples making over $450,000. For those in the lowest two tax brackets, the rate is still 0%.  For all others in between, it remains at 15%.

Alternative Minimum Tax: The AMT exemption patch is extended for 2012 to $50,600 for individuals and $78,750 for married couples.

Social Security Tax: Social Security withholding on wages increases back to the pre-2010 rate of 6.2%.

Itemized Deduction Phase Out: There is a phaseout of itemized deductions and personal exemptions for those who make more than $250,000 as an individual or $300,000 as a married couple.

3.8% Medicare Tax on Investment Income: The Patient Protection and Affordable Care Act (“Obamacare”) included a 3.8% Medicare tax on the lesser of net investment income or total income over $200,000 for individuals and $250,000 for married couples. The fiscal cliff deal does not change this.

Estate Tax: The estate and gift tax exclusion amount is $5,000,000, which is indexed for inflation ($5,120,000 in 2012, $5,250,000 in 2013). The highest estate tax rate increases from 35% to 40%. It appears that the portability option also remains.

Annual Gift Exclusion: While not part of this bill, it also worth noting that the IRS announced in 2012 that the 2013 annual gift exclusion will increase from $13,000 to $14,000.

While this last minute bill addresses many tax issues, it does not address sequestration or the debt ceiling. Both of these battles are set to be fought in a couple of months.


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