What Happened To The Fiscal Cliff?

There has been no negotiation reached on how to deal with the nation’s borrowing limit and the deadline for mandatory spending cuts has been extended for two months. However, a significant amount of what relates to individual taxpayers has been addressed in the American Taxpayer Relief Act of 2012 that President Obama signed into law on January 2, 2013. So what does the new law mean for taxpayers? Laura Saunders from the Wall Street Journal gives a great summary to answer this on the WSJ’s blog.

For an even quicker review, here is our brief breakdown:

Top Eight Things to Know about the American Taxpayer Relief Act of 2012

1. Marginal Tax Brackets – The top tax rate for individuals has risen to 39.6% from 35% on taxable income of $400,000 (single), $450,000 (married filing jointly).
2. Long-Term Capital Gain and Qualified Dividend Rate – Dividends and capital gains will continue to be taxed at the same rate under the new law.  Taxpayers subject to the 39.6% tax bracket, however, will pay 20% on all net long-term gains and qualified dividends, up from 15% in 2012.
3. AMT – The Alternative Minimum Tax (AMT) exemption amount has been established at $50,600 (single), $78,750 (married filing jointly) for 2012 and will be permanently indexed for inflation in subsequent years as will the phase outs. The act also allows nonrefundable personal credits to count against the AMT.
4. 2012 Payroll Tax Cut – The temporary two-percentage-point cut in the employee’s portion of Social Security has expired. The rate is back to 6.2% of wages up to $113,700.
5. Personal Exemptions – The Personal Exemption Phaseout has been reinstated for filers with an adjusted gross income of $250,000 (single), $300,000 (married filing jointly).
6. Itemized Deductions – The “Pease” provision has been permanently reinstated, which is a complex limitation on all itemized deductions for taxpayers above the thresholds.
7. Estate and Gift Taxes – The exemption amount will stay at the current rate of $5.12 million per individual for 2012 and will continue to be indexed for inflation each year, but the top tax rate on amounts above the exemption will rise to 40% for 2013. The estate and gift tax will stay “unified” so the entire exemption can be used at any time. Also, the “portability” rules are permanent, meaning spouses can transfer any unused portion of their exemption to the surviving spouse.
8. Conversion to Roth 401(k)s – Before the act, existing funds in 401(k), 403(b), or 457(b) governmental plans could only be converted to Roth 401(k)s if the participant separated from service, retired, or reached age 59 ½. Now, plan participants can convert at any time.