Newsletter 2012

Newsletter 2012

Fiscal Cliff

Fiscal Cliff

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Last Reviewed: Jan 2013

Last Modified: Jan 2013

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What the Fiscal Cliff Deal Means for You

  • One of the biggest changes this package will bring is not found in the Bill. That's because the change comes from the decision not to extend a tax break enjoyed by all employees. The 2% payroll tax cut employees received under former stimulus legislation has ended. This will have an immediate and significant impact on the amount of take home pay employees receive each month. If it is any consolation, this payroll tax funds Social Security, which is the one domestic spending program almost everyone wants to fix and preserve. It was difficult for both sides of the debate to see this tax break disappear, because it impacts so many people. They seem to have accepted the justification that revenue was needed to help stabilize the Social Security fund.
  • The individual income tax rates that we have been using in recent years will stay the same for all taxpayers with incomes under new threshold amounts. For single taxpayers with taxable income of $400,000 or more and married couples with income of $450,000 or more a new rate of 39.6% will apply to income in excess of these amounts.
  • The 15% rate on long term capital gains and dividends will remain for taxpayers with income less than the above threshold amounts. This special tax rate will increase to 20% for taxpayers with incomes exceeding these amounts.
  • Prior rules limiting deductions for higher income taxpayers will be reinstated. These rules limit total itemized deductions and deductions for personal exemptions. These limitations will now apply to single taxpayers with $250,000 or more in taxable income and married couples with $300,000 or more in taxable income.
  • There has been a five year extension of the increased child tax and earned income credit amounts and the American Opportunity Credit for college tuition expenses. The tuition and fees deduction has also been revived for both 2012 and 2013. Energy credits for efficient appliances have been renewed for 2012 and 2013 as well.
  • The deduction for mortgage insurance premiums was renewed for 2012 and 2013 and the sales tax deduction was renewed for 2012 through 2014. The educator expense deduction for school supplies was also revived for 2012 and 2013.
  • The exclusion of income from debt forgiveness on personal residence debt has been made available for 2013.
  • We now have a permanent (as permanent as the tax code can be anyway) fix for the Alternative Minimum Tax. It sets the income threshold for imposition of the tax at $51,900 for single taxpayers and $80,750 for married couples. These threshold amounts are indexed for inflation going forward, which was never the case before; the thresholds had to be manually adjusted every year.
  • The ability to contribute IRA distributions to a charity has been revived for 2012 and 2013 and special rules have been included that allow you to make distributions received after December 31, 2012 and before February 1, 2013 count as 2012 distributions for purposes of this rule and allow you to treat distributions received after November 30, 2012 and before January 1, 2013 as a charitable contribution if you pay the money to the charity before February 1, 2013.