What the new tax law means to you

Congress finally passed a tax bill to avoid the fiscal cliff at the last minute (actually past the last minute).  This new bill has lots of provisions and most people want to know how it is going to affect them.  Unless your AGI is over $250,000 it is not likely that you will notice much difference from the laws that were in effect prior to 2012.  This is because most of the bill simply extended the law that was scheduled to expire.

 

There are a few changes that will increase taxes for some people.  Those are:

 

A .9% increase on Medicare taxes for couples who make over $250,000. 

 

An additional Medicare tax of 3.8% on investment income of couples who make over $250,000.  This is only on investment income which includes, interest, dividends, annuities, royalties and rent.  Passive business income is also considered investment income for this tax.

 

The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% to 10% of adjusted gross income.  If you are or your spouse is over 65 then the threshold remains at 7.5%.

 

The maximum amount of salary reduction contributions to a health flexible spending arrangement is changed to $2,500.

 

Provisions that were extended or made permanent include:

Individual tax rates

All the individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).

Phase-out of itemized deductions and personal exemptions

The personal exemptions and itemized deductions phase-out is reinstated at a higher threshold of $250,000 for single taxpayers; $275,000 for heads of household; and $300,000 for married taxpayers filing jointly.

Capital gains and dividends

A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.

 

 

Alternative minimum tax

The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers.

Estate and gift tax

The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective January 1st 2013. The estate tax “portability” election, under which if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, and made permanent by the act.

Permanent extensions

Various temporary tax provisions were made permanent. These include:

  • Marriage penalty relief
  • The liberalized child and dependent care credit rules
  • Expanded adoption credit and adoption-assistance programs
  • The exclusion for employer-provided educational assistance
  • The employer-provided child care credit

Individual provisions expired at the end of 2011

The act also extended through 2013 a number of temporary individual tax provisions, most of which expired at the end of 2011:

  • Deduction for certain expenses of elementary and secondary school teachers
  • Exclusion from gross income of discharge of qualified principal residence indebtedness 
  • Mortgage insurance premiums treated as qualified residence interest 
  • Deduction of state and local general sales taxes
  • Tax-free distributions from individual retirement plans for charitable purposes 

Individual credits expired at the end of 2012

The American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2017. In addition, the bill permanently extends a rule excluding from taxable income refunds from certain federal and federally assisted programs.

These are by no means the only provisions of the law change, but they represent the ones that have the broadest effect.

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