Back in January, Congress approved the American Tax Payer Relief Act to avert a fiscal cliff. This legislation has some impacts that our clients should be aware of.
39.6% Tax Bracket
For the 2013 tax year and beyond the Bush-era tax cuts have been extended, except for those making above $400,000 ($450,000 for families / $425,000 for heads of households). Their marginal tax rate increases to 39.6%, meaning that income above these levels will be taxed at 39.6%. Nevertheless, taxpayers who find themselves in this tax bracket will benefit from the extension of the Bush-era tax rates below that level.
20% Capital Gains Tax
For the same income thresholds, the rate for capital gains and dividends goes up to 20% (from 15%). Incomes below those thresholds are still taxed at the former 15% rate. The 0% rate still applies for those with income below $72,500 for joint filers and $36,250 for singles).
The "Pease provision" (named after the congressman who introduced it) is an old limitation that has now resumed under the fiscal cliff bill. It puts into play limitations on itemized deductions based on income over $300,000 for married couples and $250,000 for singles. This affects 2013 and beyond. Taxpayers with adjusted gross incomes above the threshold are taxed on an extra amount equal to 3 percent of the excess income over the threshold. So if a couple has $800,000 of adjusted gross income, Pease adds in an extra taxable amount of $15,000 (3 percent of the $500,000 excess income) on which the couple pays $5,940 of extra tax if they're in the 39.6 percent bracket.
Personal Exemption Phaseout