Over the last several months, we have been inundated with the media’s coverage of the impending fiscal cliff which was to occur if the President and Congress did not reach an agreement to avert a number of tax increases and budget cuts that were scheduled to take effect on January 1, 2013. On January 1, 2013, both the Senate and the House of Representatives passed a bill and provided most American taxpayers a parachute for their jump from the fiscal cliff.
The highlights of this bill include the following items which would have been affected without the passage of this bill:
- Income Tax Rates. This bill extends the decade-old tax cuts on incomes up to $400,000.00 for individuals and $450,000.00 for couples. Taxpayers with earnings above those amounts will be taxed at a rate of 39.6%, which is up from the current 35% rate. This bill also extends the caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000.00 and couples making more than $300,000.00.
- Capital Gains and Dividends. The bill increases taxes on capital gains and dividend income for taxpayers earning more than $400,000.00 individually, or $450,000.00 for families from 15% to 20%.
- Estate Tax. In 2012, estates were taxed at a top rate of 35% and the first $5,000,000.00 was exempted from estate taxes. Without this new bill, the estate tax exemption would have been reduced to $1,000,000.00 and the top rate would have been 55%. Under this bill, estates will be taxed at 40% and the first $5,000,000.00, indexed for inflation, is exempted.
- Alternative Minimum Tax. This bill addresses the alternative minimum tax and indexes it for inflation providing savings to millions of taxpayers.
- Child Tax Credit. This tax credit can be worth as much as $1,000.00 for each qualifying child who is under the age of 17 at the end of 2012. This credit phases out for couples with an income of over $110,000.00, and single taxpayers who earn more than $75,000.00.
- Child and Dependent Care Credit. This tax credit is available if you pay for someone to take care of your dependent who is under age 13 so that you can work. The amount of this credit is limited to 20% to 35% of childcare expenses up to a maximum of $6,000.00.
- Earned Income Tax Credit. This credit is for married couples filing jointly with 2012 earned income under $50,270.00, and single filers who make less than $45,060.00. The amount of your income and your family size determine the amount of this credit, but the maximum credit available is $5,891.00.
- American Opportunity Tax Credit. This credit makes the Hope Credit for higher education expenses available to a larger number of taxpayers. The full maximum annual credit of $2,500.00 per student is available to individuals, whose gross income is $80,000.00 or less, or $160,000.00 or less for married couples filing a joint return.
- Medicare Payments to Doctors. This bill provides a one-year extension of the current Medicare reimbursement rates and alleviated a potential 27% cut in reimbursements to doctors.
- Unemployment Benefits. This bill extends long-term unemployment benefits for one year for approximately 2 million Americans who would have lost these benefits on December 31, 2012.
This bill does not address spending cuts to control and/or reduce the national deficit. This means that within the next couple of months, Congress will need to debate these spending issues for programs such as Medicare, Medicaid, Social Security, and the Pentagon’s budget for national defense. This bill also does not raise the country’s debt ceiling, and that issue will need to be addressed in the next couple of months as well.
As a result of the passage of this bill, approximately 99% of American taxpayers will not see any tax increase except for the 2% increase in the FICA tax. The FICA tax for the last two years has been 4.2%, and in 2013 that percentage will be increased to 6.2% up to the first $113,700.00 of income earned in 2013.
In the short term, most American taxpayers have avoided the most damaging aspects of the fiscal cliff, however, it still remains to be seen if the parachute will actually open before the American taxpayer hits the ground. The next few months will tell us if that parachute will open.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
James F. Contini II, Esq.
Certified Specialist in Estate Planning,
Trust & Probate Law by the OSBA
Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
158 North Broadway
New Philadelphia, Ohio 44663