How Will The New Fiscall Cliff Legislation Effect Me?
The 157 page American Taxpayer Relief Act of 2012 (ARTA) was signed into law by President Obama last night. This email is meant to serve as an overview of how this legislation may impact you.
Major Provisions of the Law
1. Tax brackets- the top tax bracket rises to 39.6% and applies to income in excess of $400,000 for individuals and $450,000 for couples. These brackets will be indexed for inflation. These changes are permanent (no sunset provision like in the past)
2. Capital gains and qualified dividend taxes- this law makes the 0% and 15% long-term capital gains tax rates permanent, but increases the tax rate to 20% for gains that fall in the top tax bracket ($400K/$450K threshold mentioned above). Qualified dividend treatment is also made permanent, and will follow the same rate schedules as long-term capital gains.
3. Itemized deductions and personal exemptions- the phase out of itemized deductions and personal exemptions are reinstated albeit at higher levels. They will be phased out when income exceeds $250K for individuals and $300K for couples. The net impact of each of these rules increases a taxpayer's marginal tax rate by approximately 1%.
4. Estate taxes- taxable estates less than $5 million will not be subject to federal estate taxes. This law also continues prior provisions. First, the exemption will also apply to lifetime gifts. Second, the $5 million exemption will be indexed to inflation. Finally, the $5 million is "portable" meaning that each spouse will have this exemption.
5. AMT Relief- the AMT patch has been made permanent, as it will now be adjusted for inflation annually, rather than needing Congress to pass a law to "patch" it each year.
Other Provisions (not inclusive)
1. American Opportunity Tax Credit, Child Tax Credit and Earned Income Tax Credit are extended for an additional 5 years.
2. Discharged mortgage debt is excluded from income for an additional 1 year.
3. Deduction for state and local sales taxes paid (in lieu of state and local income taxes paid) extended for 1 year.
4. Qualified Charitable Distributions from an IRA to charity is extended for 1 year (with some limitations). Also, these distributions made by February 1, 2013 can be counted for 2012 tax year.
What Wasn't Addressed
1. The 2% payroll tax cut has been eliminated (on income up to $113,700)
2. The debt ceiling has not been raised and is set to be another political time bomb in the next 2 months.
3. The spendings cuts that were scheduled to kick in have been postponed for 2 months.
In the end, much of the fiscal cliff resolution was expected: tax increases with minor spending cuts. Additional opportunities for tax planning will be analyzed in the weeks ahead and we will be sharing that information with you if it is relevant. From an investment perspective, we continue to believe there will be modest growth in the economy and tend to favor equities over bonds for longer term investors.
We encourage you to contact us with any questions your may have.