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Question: What can you tell me about the American Taxpayer Relief Act that recently was signed?
Answer: The American Taxpayer Relief Act of 2012 was signed into law Jan 2. It includes key provisions that will affect many households.
The Bush-era tax cuts are permanent with the exception of a new top rate of 39.6 percent for taxable income levels of $450,000 for joint filers and $400,000 for single filers.
Also, for income levels of $300,000 for joint filers and $250,000 for single filers, itemized deductions will be affected by the 3 percent Pease limit and personal exemptions will be phased-out.
The payroll tax holiday is over. As part of the stimulus package originally passed in 2011, the Social Security payroll tax on wages was reduced to 4.2 percent. The two-year holiday is over and the tax has gone back to 6.2 percent. This tax increase will affect all employed individuals.
The 3.8 percent Health Care Surtax kicks in for 2013. This along with the .9 percent payroll surtax for Medicare will affect income levels of $250,000 for joint filers and $200,000 for single filers.
The new top rate for long-term capital gains and dividends is now 20 percent for those in the top tax bracket of 39.6 percent. Individuals in the 10 percent and 15 percent tax brackets still will have a 0 percent tax and all others will pay 15 percent.
The Alternative Minimum Tax has been permanently indexed for inflation and no longer will require congressional action to “patch” it every year. The AMT exemption for 2012 is $78,750 for joint filers and $50,600 for individuals. The 2013 exemptions are not yet available.
The exemption for estate, gift and generation skip tax now is permanent and indexed for inflation. The 2013 exemption is $5,250,000 with a top tax rate of 40 percent. The portability feature of the estate and gift tax now is permanent and estate tax return Form 706 must be filed to get the portability. Married couples can now pass approximately $10.5 million to heirs estate tax free.
401k plan participants can rollover to an In-Plan Roth Rollover if the plan allows. This means workers can convert taxable 401k funds to tax-free Roth 401k funds within the company plan. The worker still will have to declare as income any rollover amounts.
Qualified Charitable Distributions are back for 2013. Individuals can transfer funds from their IRA directly to charities without having to pay tax on that distribution. This can satisfy their Required Minimum Distribution for the year.
These are just a brief outline of the many tax law changes in effect for 2013.
For in-depth analysis of your unique situation, please consult your local tax or financial advisor.
Wm. Steve Wright is managing member of The Wright Legacy Group LLC.