• Tax Highlights of the "Fiscal Cliff" Deal
  • January 5, 2013 | Author: Jane W. Freeman
  • Law Firm: Cacace, Tusch & Santagata - Stamford Office
  • The "fiscal cliff" deal reached by the United State Congress and to be sent to President Obama for signature will have tax impacts on most Americans and many businesses and estates.  The heaviest new burdens in 2013 will fall on top earners who will face higher rates on income, capital gains, dividends and estates.  The legislative compromise did not address the deficit or debt reduction which the new Congress will have to tackle in early 2013. 

    Tax highlights and other notable provisions of the "fiscal cliff" compromise include the following:

    • Income tax rates will increase from 35% to 39.65% on taxable income exceeding $400,000 for single taxpayers and $450,000 for married couples;

    • A 20% tax rate will apply to capital gains and dividends for individuals above the the top income tax threshold while a 15% rate is retained for taxpayers in the middle income brackets;

    • The phase out of personal exemptions and itemized deductions is reinstated with a higher threshold of $250,000 for single taxpayers and $300,000 for married couples;

    • The estate and gift tax exclusion amount is retained at $5 million, indexed for inflation, but the top tax rate increases form 35% to 40%;

    • The estate tax "portability" election (under which the surviving spouse’s exemption amount is increased by the unused amount of the deceased spouse’s exemption) is made permanent;

    • The exemption amount for the alternative minimum tax on individuals is permanently indexed for inflation;

    • The 2% payroll tax cut in 2011 and 2012 (from 6.2% to 4.2%) will expire, resulting in increased payroll taxes for workers;

    • Unemployment benefits are extended for an additional year;

    • Research and development tax credits are extended through 2013;

    • The 50% first-year bonus depreciation for new investments is extended for one year.

    Congressional action to avert the "fiscal cliff" has preserved many of the Bush era tax cuts for most wage earners and temporarily extends other tax benefits which would have expired on December 31.  However, because the payroll tax cut was not extended, most households will pay higher taxes in 2013.