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Congress Avoids Fiscal Cliff and Passes Act

Jan 2, 2013

The fiscal cliff was ultimately avoided at the last minute with Congress making some decisions on the Bush era tax cuts and tax provisions which would have lapsed. The deal which was brokered attempted to address the revenue side of the U.S fiscal issues with plans abandoned late to amend the bill to also include spending cuts. We will likely revisit spending cut decisions again along with raising the deficit ceiling over the next several months. Stay tuned.

Congress passed the "American Taxpayer Relief Act" on Tuesday early morning with the bill now set to be signed by the President.

Basically the Act targets the wealthiest Americans with increased taxes and preserves many of the tax brackets and provisions for middle income taxpayers.  Here are some of the Act's main features:

  • All of the individual tax rates which were in place in 2012 are retained (10%, 15%, 25%, 28%, 33% and 35%). A new top tax rate of 39.6% is added for those who have income in excess of $400,000 for single filers and $450,000 for married taxpayers filing jointly.
  • Itemized deductions will again be phased out as well as personal exemptions at a threshold of $250,000 for single taxpayers and $300,000 for married taxpayers filing jointly.
  • A tax rate of 20% will apply to capital gains and dividends for individuals above the top income tax bracket threshold; the 15% tax rate is retained for taxpayers in middle tax brackets and the 0% tax rate is retained for taxpayers in the 10% and 15% brackets.
  • The AMT exemption amount on individuals is now indexed with inflation. For 2012, the exemption amounts were $78,750 for married taxpayers and $50,600 for single taxpayers.
  • Estate tax exclusion is retained at $5 million and indexed for inflation but the top tax rate increases to 40% from 35% as of January 1, 2013. The estate tax "portability" election, which allows the surviving spouse's exemption amount to increase by the deceased spouses unused exemption amount was retained and made permanent.
  • The temporary lower 4.2% rate for employee's portion of the Social Security payroll tax was not extended and thus will revert back to the 6.2% rate effective January 1, 2013.

Although we do have certainty surrounding some of the tax provisions and rules for 2013, there is surely more to come with a temporary delay on decisions relative to a broad range of automatic Federal spending cuts to be revisited in March as part of the agreement.

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