Yesterday Congress passed, and President Obama signed, legislation averting for the time being a trip over the “Fiscal Cliff.” I say “for the time being” because the real slugfest is ahead during the 113th Congress. The deal did very little to address stupendous amounts of debt which most sober folks say MUST be addressed to avoid a real catastrophe . . . the question is not “whether” but “how” to address the problem.
In the meantime, the tax resolutions were relatively benign unless you happen to have taxable income of more than $400,000 a year. Now $400,000 is a lot of money, and it doesn’t apply to most of my clients . . . but occasionally . . .
For most nonworking folks, however, it will be business as usual until the real problems kick-in (see the first paragraph of this article). For working folks (Everyone . . . not just the “rich”) payroll taxes will grab an extra 2% of pay and they’ll feel that in the next paycheck.
In a Nutshell:
All the old income tax rates apply unless you are an individual with taxable income of $400,000 or more or a couple with taxable income of $450,000. If you fit in this category you get a new tax bracket! Lucky you: 39.6%
If you fit the group with new tax bracket ($400,000/$450,000) long-term capital gains will set you back an extra 5% at 20% . . . the rest of your friends will be taxed at the “usual” 15%.
We’ve been going back and forth over the past decade on phasing out personal exemptions and certain deductions for all taxpayers. Congress usually rode in with a last minute fix. Now there is a permanent solution with no phase-out UNLESS . . . you happen to be part of a married couple filing jointly earning over $300,000 or are a single taxpayers earning over $250,000.
The provisions on estate taxes left me dumbfounded . . . I was expecting much harsher treatment. The only significant change is that the estate tax, if it applies at all, raises to a maximum of 40% from 35%. The exemption amount (the amount that an individual can leave “estate-tax-free”) stays at $5.12 million (and may even be going to $5.25 million after adjustments). That is $5.12 million EACH for Mom and Dad . . . and whatever one spouse doesn’t use at death can carry-over and be added to the surviving spouse’s $5.12 million. For almost all Americans, the estate tax is dead. The big relief for most affected people (and their lawyers and accountants) is that we have permanent rules . . . certainty after 12 years of up-and-down-and-all-around. No more wondering from year-to-year.