The “American Taxpayer Relief Act of 2012” approved by Congress just after we plunged over the “fiscal cliff” restores and modifies several expired tax breaks, but doesn’t address other issues. Here are the highlights of the new law’s provisions for individual taxpayers.
*Individual income taxes. Only the wealthiest taxpayers face an income tax increase in 2013. A new individual tax rate of 39.6% will apply to single filers with income above $400,000 and joint filers with income above $450,000. Otherwise, the 2012 tax rate structure is permanently extended. However, beginning in 2013, a new 3.8% Medicare surtax authorized by the 2010 health care law also applies to certain high-income investors.
*Capital gains and dividends. Under prior law, the maximum tax rate for net long-term capital gains would have been boosted to 20%, while qualified dividends were scheduled to be taxed at ordinary income rates, beginning in 2013. The new law extends the favorable 15% tax rate for most taxpayers and extends the zero tax rate for those in the 10% and 15% brackets for ordinary income. However, for single filers with income above $400,000 and joint filers with income above $450,000, the maximum tax rate on long-term gains and qualified dividends increases to 20%.
*Alternative minimum tax. Retroactive to January 1, 2012, the new tax law permanently revamps the alternative minimum tax (AMT) to avoid increased exposure to this tax. Without the latest fix, an estimated 30 million more filers would have been required to pay the AMT for the 2012 tax year.
*Payroll tax holiday. The 2% reduction in payroll taxes ends. Employees will pay a 6.2% social security tax instead of the 2012 rate of 4.2%. Similarly, the social security tax rate for self-employed individuals reverts to 12.4% from 10.4%.
*Itemized deductions and personal exemptions. Restrictions are imposed on high-income taxpayers with income above a specified threshold. For single filers with adjusted gross income (AGI) above $250,000 and join filers with income above $300,000, certain itemized deductions are reduced by 3% above the threshold, but the overall reduction cannot exceed 80%. Personal exemptions are phased out above the same AGI thresholds without the 80% cap.
*More on the American Taxpayer Relief Act of 2012 next week.