Washington has avoided the Fiscal Cliff for the time being with the passing of the American Taxpayer Relief Act (“Act”). While this Act addresses various tax issues, the below focuses on several key issues of the Act:
- The top marginal income tax rate will increase from 35% to 39.6% for individuals with taxable income above $400,000 and married taxpayers filing jointly with taxable income above $450,000;
- An increase in the tax rate on long term capital gains (other than collectibles and recaptured section 1250 gain) and qualified dividends from 15% to 20% for individuals in the 39.6% tax bracket. The long term capital gains and dividends tax rate will remain at 15% for most other taxpayers;
- Due to the 3.8% Medicare surtax (which was unaffected by the Act), higher income individuals will face a 23.8% federal tax rate on capital gains and dividends;
- The “Peace provision” will return in 2013. This provision limits itemized deductions for higher income taxpayers. Those taxpayers subject to the limitation will see their itemized deductions reduced by 3% of the amount by which their adjusted gross income exceeds the threshold amount, with a reduction not to exceed 80% of otherwise allowable itemized deductions. The threshold amounts for this provision are as follows:
- $250,000 for individuals;
- $300,000 for married taxpayers filing jointly and surviving spouses;
- $275,000 for heads of household; and
- $150,000 for married taxpayers who file separately.
Additionally, the Act did not extend the two-percent point reduction as to the employee’s portion of the Social Security Tax. In 2011, the Social Security Tax was reduced from 6.2% to 4.2% of the employee’s portion. With the passage of the Act, the tax rate will return to 6.2% on income up to $113,700.
IRS Circular 230 Disclosure. To ensure compliance with U.S. Treasury Regulations governing tax practice, we inform you that any tax advice contained in the foregoing material was not written or intended to be relied upon, nor can it be used, by any taxpayer for the purpose of (i) avoiding tax penalties or (ii) promoting, marketing or recommending to another person any tax-related matter or transaction. This blog post is being provided for informational purposes only and you should consult your own tax advisor regarding your personal tax situation before making any further decisions.