The fall off the fiscal cliff was not as hard as it could have been

As a result of last minute wrangling and voting, Congress extended many of the lower tax rates and exemptions that were scheduled to expire on December 31. Here is a summary of the key provision from the “American Taxpayer Relief Act” of 2013:

 

  1. Individual tax rates stay at 10, 15, 25, 28, 33 and 35 percent with a new tax rate of 39.6% .
    The top rate applies to income levels above:
    Joint Filers  $450,000
    Single Filers  $400,000
    Head of Household $425,000
    Married separate filers $225,000
  2. Personal exemptions phase out by reducing your personal exemptions by 2% for every $2,500 that AGI exceeds:
    $300,000 for joint filers
    $275,000 for head of household
    $250,000 for single filers
    $150,000 for married filing separate
  3. Itemized deductions phase out by reducing you itemized deductions by 3% of the amount by which AGI exceeds:
    $300,000 for joint filers
    $275,000 for head of household
    $250,000 for single filers
    $150,000 for married filing separate
  4. Capital gains, including qualified dividends, will be taxed at:
    0% for those in the tax brackets below 25%
    15% for those in the brackets from 25% to 35%
    20% for those in the 39.6% bracket
  5. Estate and gift tax rates increase to 40% instead of 55% and the unified credit for estate and gift tax exemption stays at $5 million and that amount if now indexed for inflation.  Portability of unused credit between spouses is also retained.

There are some other minor extensions such as the 5 year period for taxation of built-in gains for S Corporations and extension of tax free distributions from IRA to charities.  Probably the biggest item that was not extended was the payroll tax cut, so effective January 1 FICA taxes taken out of employees paychecks went back to 6.2% which combined with Medicare tax is now 7.65% again and the combined self-employed tax rate will go back to 15.3% for 2013.

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About Author: RivesCPA
Certified Public Accountant Chartered Global Management Accountant

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