What Just Happened?

As you know by now, Congress just passed a new bill, the "American Taxpayer Relief Act," to address the tax part of the fiscal cliff.  This bill staves off a number of changes which were scheduled to happen and also enacts a number of new tax provisions.  We'll be writing about this in more detail, but here are the highlights on income tax rates and the estate tax:

Income Tax rates. The income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6% as would have occurred), but with a 39.6% rate applying for income above a certain threshold. The applicable threshold is $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. These dollar amounts are inflation-adjusted for tax years after 2013. In effect, this means a new bracket is created for income over $400,000/$450,000.

Capital gain and dividend rates rise for higher-income taxpayers. The top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). For everyone else, the existing rate (15%) is preserved.

Estate tax provisions kept intact with slight rate increase. The law prevents steep increases in estate and gift tax that were slated to occur for 2013 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation). However, the bill also permanently increases the top estate, gift and rate from 35% to 40%. The law continues the portability feature that allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse. All changes are effective for individuals dying and gifts made after 2012.