The Impacts of the Fiscal Cliff Deal
January 3, 2013

The automatic tax hikes and spending cuts that comprised the "fiscal cliff" were mostly averted on January 1, 2013 when the House voted to approve a Senate plan that extends most of the Bush-era tax cuts except for high-income earners. As the process and debates have been volatile and convoluted, we wanted to inform you of the major impacts of the deal and how it will affect your future tax scenario.

Individual Tax Rates for 2013
All the individual marginal tax rates will be preserved in 2013. However, there is now a top rate of 39.6% for those persons filing jointly with taxable income exceeding $450,000. See graph below for anticipated tax rates.
Married Filing Jointly

Payroll Tax Holiday Expiration
One of the most visible impacts to all taxpayers will be a decrease in take-home wages as a result of the expiration of the 2% reduction in Social Security tax. The employee share of Social Security tax for wages below the Security wage base ($113,700) will now be subject to a tax of 6.2% beginning January 1, 2013.

Dividends and Capital Gains
The dividends and capital gains rates will increase to 20% for individuals with taxable income of $400,000 and those filing joint returns making $450,000. The rates will remain at zero for those taxpayers in the 10% and 15% tax brackets and 15% for those people with taxable income filing jointly below $450,000.

Itemized Deduction and Personal Exemption Phaseouts
The itemized deduction and personal exemption will both be subject to phaseouts for individuals earning $250,000 and $300,000 for married filing joint taxpayers. The net effect of this provision is a "hidden" tax rate increase of 2% to those joint filers with over $300,000 of taxable income.

Alternative Minimum Tax
A permanent AMT patch has been added and adjusted for inflation. The exemption amounts for 2012 are $50,600 for single filers and $78,750 for married filing joint taxpayers.

Estate Tax
The estate tax will continue to have a $5 million exemption ($10 million for married couples), but the top tax rate will increase from 35% to 40% beginning January 1, 2013.

Tax Credits
Numerous tax credits for individuals and businesses were impacted by the fiscal cliff deal. These credits are highlighted below:
  • The American Opportunity Tax Credit for qualified tuition and other expenses for higher education is extended through 2018
  • The $1,000 Child Tax Credit is extended through 2018
  • The Earned Income Credit is extended through 2018

Individual Provisions and Extensions
In addition to various credits being extended, the act also extended through 2013 numerous individual tax provisions. These include:
  • Deduction for certain expenses of elementary and secondary school teachers
  • Deduction of state and local general sales taxes if they exceed state income tax paid
  • Deduction of qualified tuition and related expenses
  • Increased standard deduction for married taxpayers filing jointly

Business Provisions and Extensions
Many advantageous business tax benefits were included in the bill:
  • Section 179: Immediate depreciation (expensing) of the costs of assets will be available for all asset purchases up to $500,000
  • The provision allowing depreciation expense for up to 50% of the cost of a new asset was extended to 2014
  • Businesses will continue to receive research tax credits and production tax credits through 2013
The recent legislation is complex with its numerous rules and implications. Please contact us with any questions you may have regarding how the new rules will impact your business or individual tax circumstances, or if you would like more information.
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Soukup, Bush & Associates, P.C.
(970) 223-2727