Congress passed legislation, which President Obama
indicated he would sign, to avoid the fiscal cliff.
The legislation would allow tax rates to rise on the
nation's highest earners while also extending dozens of tax cuts for individuals
and businesses. Specifically, the bill:
•
Raises the top tax rate to 39.6% for married couples earning $450,000;
head of household earning $425,000; single taxpayers earning $400,000. These
amounts will be indexed for inflation.
•
Raises long-term capital gains and qualifying dividends tax rate to 20%
(from 15%) for taxpayers in the 39.6% tax bracket for regular and alternative
minimum tax.
•
Permanently extends Bush-era tax cuts from 2001 and 2003 for all other
taxpayers.
•
Reinstates phase-out of personal exemptions and overall limitation on
itemized deductions for married couples filing jointly earning over $300,000 and
single taxpayers earning over $250,000.
•
Raises the maximum estate tax rate to 40% but keeps the exemption amount
at $5 million, adjusted for inflation.
•
Extends for 5 years (through 2018) the American Opportunity Tax Credit to
pay for higher education, and special relief for families with 3 or more
children for the refundable portion of the child tax credit and increased
percentage for the earned income tax credit.
•
Patches the AMT for 2012 and adjusts the exemption amount for inflation
going forward.
•
Extends through 2013 the following individual tax benefits: above the
line deduction for teacher expenses, relief from cancellation of debt income for
principal residences, parity for employer-provided mass transit benefits,
deduction for mortgage insurance premiums as interest, election to deduct state
and local sales taxes in lieu of income taxes, above the line deduction for
qualified education expenses, tax-free distributions from IRA accounts for
charitable purposes.
•
Extends through 2013 certain business tax provisions that expired at the
end of 2011 including: the research credit, the new markets tax credit, railroad
track maintenance credit, mine rescue team training credit, work opportunity
credit, the Section 179 asset expensing at $500,000, Section 1202 stock
exclusion at 100%, and empowerment zone incentives.
•
Extends 50% bonus depreciation through 2013.
•
Extends through 2013 certain energy tax incentives that expired at the
end of 2011 including: energy efficient credit for existing homes, alternative
fuel vehicle refueling property credit, biodiesel and renewable diesel
incentives, wind credit, energy efficient credit for new homes, and credit for
manufacture of energy efficient appliances.
Unfortunately, the legislation does little to address
spending by the federal government!
Based on additional tax of 3.8% imposed by Obamacare on
high-income earners and return to former withholding rates, all taxpayers will
be impacted as the following chart indicates.
Note:
The Addendum breaks down the Top Quintile further.