Summarizing the American Taxpayers Relief Act of 2012

In the wee hours of January 1, 2013, Congress averted the fiscal cliff by passing the American Taxpayers Relief Act of 2012.  After months of speculation over the future of taxes and spending, Congress passed a bill that raises taxes on all Americans while deferring spending cuts until the Spring.  Those Americans deemed “wealthy” by the politicians were hit hardest.  The following is a brief summary of the changes most likely to impact the average Bridge Ventures client, a small business owner in one of the top tax brackets.

Income Taxes: The most talked about change is the addition of a new 39.6% income tax rate for individuals earning more than $400,000 and married couples earning more than $450,000. This applies only to income above the aforementioned threshold, and the Bush tax cuts were made permanent for income levels below this threshold.

Capital Gains and Dividends: The top rate for capital gains and dividends rose from 15% to 20%, and applies to all taxpayers in the 39.6% tax bracket.  Anyone earning less than $400,000/$450,000 will continue to pay 15%.

Payroll Taxes: The payroll tax holiday, which reduced the employee share of Social Security tax by 2%, expired.  Employees now pay the full 6.2% Social Security tax on the first $113,700 of income.

Deductions and Exemptions: Itemized deductions and personal exemptions are reduced for individuals earning over $250,000 and couples earning over $300,000.

Estate Taxes: The federal estate tax increased from 35% to 40%, with an exemption for the first $5.12 million; the exempt amount will increase annually at the rate of inflation.

New Medicare Taxes: Independent of the fiscal cliff bill, two new Medicare taxes take effect in 2013.  The first applies an additional 0.9% tax on wages in excess of $200,000 for single filers and $250,000 for married couples filing jointly.  The second applies a 3.8% surtax on all investment income in excess of this same threshold.

If you would like to read a more detailed description of the new taxes that go into effect in 2013, we recommend the following:

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