Congress passed the American Taxpayer Relief Act of 2012 on January 1st, 2013, providing taxpayers with clearer expectations about what lies ahead.
Social Security Payroll Tax Reverts to 6.2% from 4.2%: Back in 2010, President Obama and Congress cut the Social Security payroll tax rate for individuals to 4.2% instead of 6.2%. The rate remained at 4.2% for 2011 and 2012, but this cut was set to expire in 2013. Congress’ recent vote decided to let it expire, which means that all taxpayers will now pay 2% more in Social Security taxes this year.
Most Bush-era Tax Cuts Extended: In 2001 and 2003, legislation passed under President Bush lowered marginal tax rates for most U.S. taxpayers, reduced dividend and capital gains taxes, and enhanced a number of tax credits. The tax package passed on January 1st, 2013 extends most of these tax cuts for taxpayers with incomes lower than $400,000 (individuals) and $450,000 (married couples). Taxpayers with incomes above the thresholds listed will face a 39.6% tax rate instead of 35%, but only on income that exceeds the thresholds. Their capital gains rate would also increase, from 15% to 20%. Also, a new 3.8% surtax on investment income (to fund Obamacare) will be imposed on individuals making more than $200,000 and married couples making more than $250,000.
Estate Tax Higher, AMT Indexed to Inflation: The inheritance threshold above which the estate tax applies was supposed to revert to $3.5 million instead of $5 million, but according to Congress’ decision, it will not. However, above the $5 million threshold, the estate tax rate will now be 40% instead of 35%. Other provisions include that the Alternative Minimum Tax (AMT) would be indexed to inflation, and federal unemployment benefits would be extended for a year.