January 2, 2013

The Fiscal Cliff…What You Need To Know NOW

Early on New Year’s Day, Congress passed a bill to avert automatic spending cuts and tax increases originally designed to save Congress from itself by gradually reducing the debt (aka “fiscal cliff”).

Below are details of the tax changes as it applies to individuals:

  • For individuals with income over $400,000 (single filers) and $450,000 (joint filers), a new 39.6% bracket will apply. All other individuals with income under these levels will retain the same tax brackets as under previous 2011 law. Please note that the Alternative Minimum Tax (AMT) rates will not change.
  • For individuals with income over $400,000 (single filers) and $450,000 (joint filers),the tax on qualified dividends and long-term capital gains will rise from a maximum of 15% to a maximum of 20%.

The below chart summarizes the highest Federal individual tax rates for the various income levels under the new Bill for 2013:

Income < $200k/$250k Income < $400k/$450k Income > $400k/$450k
Ordinary Services Income 35.9% 1 37.9% 1 43.4% 1
Ordinary Interest Income 33% 38.8% 2 43.4% 2
Qualified Dividend Income 15% 18.8% 2 23.8% 2
Short-Term Capital Gains 33% 38.8% 2 43.4% 2
Long-Term Capital Gains 15% 18.8% 2 23.8% 2

1 Includes Medicare Tax of 2.9%
2 Includes Medicare Tax of 3.8%; does not account for phase-out of certain itemized deductions scheduled beginning 2013

  • A permanent AMT “patch”, to be adjusted annually for inflation, will apply retroactively to 2012.
  • The temporary 2% social security payroll tax reduction will not be extended.
  • As a reminder, the medicare surcharge tax on investment income of 3.8% will also apply to taxpayers with income over $200,000 (single filers) and $250,000 (joint filers)
  • The “Pease” itemized deduction phase-out as well as the personal exemption phase-out will be reinstated starting with adjusted gross income (to be adjusted for inflation) of $250,000 (single filers) and $300,000 (joint filers). The “Pease” limitations reduce most itemized deductions by 3 percent of the amount in which AGI exceeds the specified thresholds up to a maximum of 80 percent of itemized deductions.
  • The estate tax regime will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples), but with a higher tax rate of 40%.
  • The IRA-to-charity exclusion will be extended through 2013. Taxpayers can directly transfer up to $100,000 from their IRA’s to qualified charities.

For business filers, the following provisions were also extended through 2013:

  • Bonus depreciation has been extended through 2013.
  • The Section 179 depreciation limit has been set at $500,000 for 2012 and 2013.
  • 15-year depreciation and Section 179 expensing will continue to be allowed on qualified real property (generally leasehold improvements/retail/restaurant property) through 2013.
  • The Research Credit has been extended through 2013.

If you have any questions regarding any of these tax law changes and how they affect you personally, please contact us and we would be happy to discuss with you.