Was the Fiscal Cliff Averted?

The American Taxpayer Relief Act of 2012 represents a mixed bag for small businesses and individuals

Are you as sick of the words “fiscal cliff” as I am? Better yet, do you really believe that the new law has saved us from it? After reading the highlights over and over the past couple of days, I am less convinced than ever. I found the special interest pork included interesting, but I was certainly not surprised. Bless NASCAR, the farmers and Hollywood for their strong lobbies.

Individuals and businesses made some gains and took some hits from The American Taxpayer Relief Act of 2012.

 

 

Individuals

Ordinary income rates—For those earning LESS THAN $400,000 if single, $450,000 if married filing jointly, or for heads-of-household earning less than $425,000, the tax rates remain the same. The 10, 15, 25, 28, 33 and 35 percent rates are unchanged for 2013. If you exceed those thresholds, the top rate is boosted to 39.6 percent. That is some good news for most people. However, the payroll tax holiday on the Social Security portion of FICA tax paid by employees has been adjusted back up to 6.2 percent, a 2 percent increase on your wages or self-employment income up to the wage base of $113,700. I think it’s obvious who that will affect.

Itemized deductions and personal exemptions—When you hit certain dollar thresholds, your exemptions and certain itemized deductions will be reduced beginning in 2013. For married couples filing jointly that threshold is $300,000, $250,000 for single taxpayers, $275,000 for heads-of-household and $150,000 for married filing separately. The exemptions will be reduced by 2 percent for each $2,500 (or portion thereof) by which the taxpayer’s adjusted gross income exceeds the threshold amount. The itemized deductions will be reduced by 3 percent of the excess threshold amount, with the reduction limited to 80 percent. Also note that the reduction of deductions does NOT apply to medical expenses, investment interest expense, wagering, casualty or theft losses.

Alternative minimum tax relief—This was a big one! As I did end-of-year tax planning, I found more and more middle-income people subject to this onerous tax. Not only did Congress finally add a permanent “patch” to it, but they made it retroactive to Jan. 1, 2012! This will literally save many taxpayers, estimated to number about 30 million, thousands of dollars this year. The exemption amounts will now be indexed each year going forward.