Will your taxes go up or down in 2013?
So our dysfunctional government managed to somehow come together and pass the American Taxpayer Relief Act of 2012, which will prevent us from sailing over the fiscal cliff like Thelma and Louise. At least for now.
There are still plenty of budget issues to address as this compromise merely delayed any decisions on spending cuts and the debt ceiling so you can bet 2013 will have its share of political battles over the economy.
But for today let’s focus on what the latest tax changes mean to you. Most of the talk has been about how this legislation averts the disaster that would have seen millions of Americans paying thousands more in taxes each year. But many people don’t realize that they will still see an increase in the taxes in 2013.
What are the Key Features of the American Taxpayer Relief Act of 2012?
- Income tax rates will remain the same for taxpayers earning less than $400,000 as individuals or $450,000 as a married couple. A new tax rate of 39.6 percent (up from 35 percent) was created for income over those amounts.
- The tax rate on capital gains and dividends will be increased from 15 percent to 20 percent, but only for those with incomes above $400,000 or $450,000 as described above.
- The estate tax will increase from 35 percent to 40 percent, but only for estates worth over $5 million.
- Unemployment benefits were extended for approximately two million unemployed workers who would have ceased receiving benefits as of January 1.
- The Alternative Minimum Tax was adjusted and is now tied to inflation. Passed in 1969, this tax was originally enacted to prevent the wealthy from avoiding income tax. Over time it has spread deeply into the middle class, but the new changes mean that millions of taxpayers will be safe from the AMT.
- Milk prices will remain stable. There was fear that a Department of Agriculture program that protects dairy farmers from price fluctuations would be cut and the result would be skyrocketing milk prices of up to $8 per gallon.
- Several tax breaks that are important to families were extended, including the Child Tax Credit and the Earned Income Credit.
- While this all sounds pretty good, there was one expiring tax cut that was not renewed. The payroll tax cut that was passed in 2010 has now expired and that means the tax that goes to fund Social Security will increase from 4.2% to 6.2%. In other words, you can expect your paycheck to be about 2 percent lighter in 2013.
Immediate reaction to the bill was mostly positive as the stock market skyrocketed over 300 points. But there are still many long-term questions about the budget and the economy in general that need to be answered.
What are your thoughts on the Fiscal Cliff Bill? Did it do enough to get our economy on the right track, or is it just another band-aid?