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American Taxpayer Relief Act: Fiscal Cliff Resolved

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Form 1040We haven’t been writing much about the fiscal cliff because it’s something we’ve known about for months, but Congress, last week, reached an agreement that would resolve the tax aspects of the cliff. I personally thought we’d get a resolution before the end of the year but they managed to get a deal done a few days afterwards, which was good enough.

The basic gist was that many things were extended and made permanent. Only folks who earned more than $400,000/$450,000, which was the line in this particular bill, and investors saw their long term capital gains rates increase if they had a high income.

Tax Rates

The Bush era tax cuts were made permanent with the top rate increasing to 39.6% for married filing jointly tax filers with incomes of $450,000 or more ($400,000 for single filers). Every other tax bracket rate remained the same.

There are two interesting parts to what happened with rates. First, the fact that they settled on $400,000/$450,000 was a concession by both sides. Republicans wanted no increase and President Obama set the line at $200,000/$250,000. In reality, very few people saw an increase because very few people earn $400,000/$450,000.

Next, the Bush era tax cuts were made permanent. A new law could change that but previously the cuts were extended (President Obama extended them two years ago) by law. Now, unless Congress passes a law, the brackets will remain at these levels.

Lastly, these brackets are indexed to inflation, glad Congress is finally understanding the importance of this.

Itemized Deductions, Personal Exemptions

After a reprieve, the phaseout provision is back for itemized deductions. For adjusted gross income over $300,000 (MFJ) or $250,000 (Single), the phaseout reduces total itemized deductions by 3% over those values. Personal exemptions are also reduced by 2% of the total exemptions for each $2,500 you are over the $300,000/$250,000 AGI limit.

Other Important Changes

Investment Taxes
The next big change that happened is that long term capital gains and dividend tax rates were made permanent, though those in the $400,000/$450,000 tax bracket will pay 20% instead of 15%. So the long term rate is as low as 0% and as high as 20%.

Estate taxes saw the highest tax rate increase to 40% but the estate tax doesn’t affect the first $5 million.

American Opportunity Tax Credit, Child Tax Credit, and Earned Income Tax Credit were extended for five years, set to expire in 2017.

There were a few other things in the bill like a permanent “patch” for AMT, Roth conversions, and a deeper analysis you can read about here. Full bill here and WSJ’s analysis here.

Overall, I think most taxpayers will be happy with what they saw though there was a lot of political back and forth.

(Photo: aidanmorgan)

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8 Responses to “American Taxpayer Relief Act: Fiscal Cliff Resolved”

  1. Jim M says:

    Thanks for the explanation – get ready for the next battle – raising the debt limit – coming soon…

  2. I am glad they fixed my income tax rate but the SS rate going up will surprise a lot of people. I don’t think they show have lowered the rate in the first place but now people expect it.

  3. Dave says:

    I find the whole term “fiscal cliff” a joke. Yeah, we avoided this potential setback, but isn’t the fact that we have over $16 trillion in debt and no plan on reducing the real “cliff”? Seems to me that at one point our fiscal policies are going to catch up to us and we’ll go over the cliff?

    • Ben says:

      Yes Dave, I agree. 16 trillion is the tip (or the visible part) of the iceberg. There is much, much more beneath the surface that we cannot see. The 16 trillion tip should be a dire warning commanding our attention but most are complacently ambivalent enough to be distracted by trivial questions and red herrings: slight of hand tricks like, “Look over there!!{{while I reach for your wallet}}…

  4. mannymacho says:

    We got the tax reform yes, but real spendng cuts no.

  5. It all seems like the chicken who said “The sky is falling” too many times.

  6. govenar says:

    You didn’t mention the tax increases that apply to more people: 2% payroll tax increase, and 3.8% Obamacare tax on investments if you make over $200,000 ($250,000 for a married couple).

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