On January 1, 2013 Congress passed what is now known as the American Taxpayer Relief Act, which was then signed into law by President Obama. This is the law that prevented us from going over the so-called “fiscal cliff” that would have raised taxes on pretty much everybody. This is a real simple summary of the key provisions:
1. Tax brackets were made permanent and the new top marginal rate was added. In 2001 Congress established tax brackets of 10%, 15%, 25%, 28%, 33%, and 35%. This new tax law made those tax brackets “permanent.” (Of course, you should understand, and probably do, that even permanent laws are only permanent until the next law comes along that changes it). In addition to making those existing brackets permanent, they added a new top marginal rate of 39.6%
2. Gift and estate tax exemption was made permanent. The law says that the $5 million per person gift and estate tax exemption is now permanent. This exemption will also be indexed for inflation in the future.
3. Capital gains rates increased. The Act raises the capital gains and dividend tax rate to 20% for taxpayers in the top income tax b racket. Folks in the middle will still pay capital gains and dividends at 15% and the taxpayers on the lower end of the economic scale will actually have a 0% rate.
4. There is a new tax for the Affordable Care Act (sometimes referred to as “Obamacare”). There is a new 3.8% investment surtax that is part of the Affordable Care Act. This kicks in in 2013 for individual taxpayers who make more than $200,000 or married couples that make over $250,000. This is added to the capital gains tax rate, which means that the folks at the top brackets will now pay 23.8% on capital gains.
5. There is a phase out of personal exemptions and a limit on itemized deductions. The Tax Act phases out personal exemptions and limits itemized deductions at the threshold of $250,000 or $300,000 for married couples filing jointly.