Congress dove off the fiscal cliff at midnight, December 31st, but then quickly passed legislation preserving the Bush tax cuts for all but the highest income earners. The full text of the legislation is contained in H.R. 8.
Individuals
Despite President Obama’s insistence that those earning more than $250,000 pay higher taxes, the final amount was almost doubled to $400,000 for single files and $450,000 for married couples. (“new ceiling”).
Income exceeding the new ceiling is taxed as follows (i) capital gains and dividends at 20%; and (ii) ordinary income (compensation, retirement distribution, rents, interest, royalties) at 39.6%, the rate under President Clinton. The alternative minimum tax exemptions were increased to $50,600 for individuals ($78,750 for joint filers) and indexed for inflation.
Deductions and Credits
Itemized deductions remain subject the phase-out rules, but the thresholds have been raised to $250,000 for individuals and $300,000 for married couples. Tax credits have been continued for five years, including the earned income credit, educational credits and the child care credit.
New Obamacare Tax
Starting in 2013, investment income [1. Generally, investment income is all income except compensation, active business income, municipal bond interest, life insurance proceeds and retirement distributions] is subject to an additional 3.8% tax to pay for Obamacare and applies to income in excess of $200,000 for individuals and $250,000 for married couples.
Estate and Gift Tax
The 2012 estate and gift tax rules will continue with one minor modification. The unified estate and gift exemption remains at $5 million per individual ($10 million for a couple) and is indexed for inflation ($5,120,000 in 2013), but the tax rate is increased to 40%.
Payroll Tax and Unemployment Benefits
The 2% break for payroll taxes on the first $113,000 of compensation will expire, thus raising taxes for almost all wage earners; however, long-term unemployment benefits are extended for another year.
S Corporations
The 10-year waiting period for built-in gains (gains taxed at the corporate rate of 35%) has been slashed to 5 years, so small corporations with built-in gains may want to convert to S corporation status. After the five-year period, those gains will be taxed at individual capital gains rates (15% for those under the ceiling).
Miscellaneous Provisions
The rules regarding income from the discharge of indebtedness involving a principal residence were continued through 2013. Research and development credits were extended, as well as the 50% bonus first year depreciation tax break.
Footnotes
