Update 2nd January 2013
Highlights of the bill signed into law by President Obama at Wednesday 2nd January 2013 aimed to avert wide tax increases and budget cuts scheduled to take effect in 2013. .
- Income tax rates: extends the so called "Bush Tax Cuts" on incomes up to $400,000 for individuals, $450,000 for couples. Earnings above those amounts will be taxed at a rate of 39,6% up from the current 35%.
- Limits on itemized deductions and the phase out of personal exemptions for individuals making more than $250,000 and couples earning more than $300,000.
- Extension for 5 years of the child tax credit, the earned income tax credit and an up to $2500 tax credit for college tuition.
- Extends jobless benefits for the long term unemployed for one year
- Capital gains and dividends income exceeding $400,000 for individuals and $450,000 for families will increase from 15 to 20%. The top rate will go to 23.8%.
- Social security payroll tax cut expires, it was two years 2%, but becomes 6.2% again.
- Extends for the one year accelerated bonus depreciation of business investments in new property and equipment, a tax credit for research and development costs and a tax credit for renewable energy.
- Estate tax: estates will be taxed at a top rate of 40%, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012 the top rate was 20%.
- 27% Cut in Medicare reimbursement to doctors for one year.
Update 29th December 2012
The so called "Bush Tax Cuts" are the biggest chunk of the fiscal cliff that starts to take effect on January 1st 2013. The fiscal cliff includes $7 trillion worth of tax increases and spending cuts over a decade. They will expire on January 1st 2013 unless Democrats and Republicans come to an agreement before the end of the year.
The crux of the controversy is whether to extend the portion of the Bush tax cuts that apply to a high income. House Speaker Boehner and the House Republicans proposed to extend them. Obama and Senate Democrats proposed to expire them for households with an income over $200,000 (255,000 for married couples).
Both parties offered concessions on Friday 21st of December. Boehner offered an extension of lowered tax rates on income under $1 million, and Obama on income under $400,000. Both men left Washington on Friday, leaving the looming spending cuts and tax increases for after Christmas.
The Bush Tax Cuts lower the federal income tax rates for everyone. Here are some of the most important Bush-era tax cuts that might cost you money if they would expire in 2013.
Tax Brackets - The 10% tax bracket will expire, reverting to 15%, which would apply to all incomes below $34,550. The 25% rate would rise to 28%, the 28% rate to 31%, 33% to 36% and the 35% bracket would go up to 39.6%.
Marriage Penalty - The standard deduction for married couples filing jointly will be eliminated, no longer a standard deduction double what it is for single filers.
Child Tax Credit - will fall from $1,000 to $500
Phase Out Personal Exemption – The phase out was gradually eliminated over time, if no extension is passed the phase out will resume at incomes over $122,500.
Tax rate on qualified dividends and capital gains will rise.
Read more on the list of expiring tax cuts at:www.taxfoundation.org
What could be the result of the expiring Bush cuts?
- A married couple earning $50,000 with two children under 17 would have to pay $2,900 more in federal tax while a single person at the same income would have to pay an additional $1,100.
- A married couple earning $70,350 with two children under 17 now pays $2,300 in federal tax. If the cuts expire, that bill would more than double to $4,900.
- A married couple earning $150,000 with two children under 17 would see their bill rise by $4,900 to $22,400.
Source: "Heal your cuts" - New York Post
See also: "How much your taxes may rise if the Bush cuts expire" at Money.cnn.com – a stat gives an overview of the tax hike for singles and married couples with two kids.
See more about the fiscal cliff:
- Payroll Tax Cuts
- Fiscall Cliff