Late last night the Senate voted to step back from the fiscal cliff. The Senate passed the American Taxpayer Relief Act of 2012 (H.R. 8). The bill addresses the revenue side of the fiscal cliff and deferred most decisions on the spending side for another two months. The House of Representatives is expected to vote on the bill today. The full text of the bill can be found here.
The highlights of the tax provisions are below. We caution that until the House votes to accept the bill (this is actually a House bill that has been overhauled by the Senate) and it is signed by the President, the bill may change.
Income Tax Provisions
The highest marginal tax rates for single taxpayers earning $400,000 and married taxpayers earning more than $450,000 (“High Income Earners”) will increase to 39.6%. This is an increase from 35%. All other taxpayers will have the same rates as they did in 2012.
The Alternative Minimum Tax (AMT) is permanently patched. This adjustment is retroactive to the 2012 tax year.
Dividends will continue to be taxed as capital gains. For High Income Earners the long-term capital gains rate will increase by 5% to 20%.
Itemized deductions and the personal exemption phase-outs return but with higher thresholds. Itemized deductions will be phased-out for taxpayers earning $300,000. The personal exemption phase-out will apply to taxpayers earning $250,000.
The Senate also extended some personal and business tax credits. Specifically, the research and experimentation and production tax credits have been extended on the business side. For personal taxpayers, the child care, college tuition, and Eared Income Tax Credit have been extended.
For S corporations, the built-in gains tax period is temporarily reduced from 10 years to 5 years. This reduction applies to tax years beginning in 2012 and 2013.
The estate tax exemption for 2012 will be retained. This means that individuals will have a $5 million exemption that is indexed to inflation. Married couples will have $10 million. In 2012, the exemption amount was $5,120,000.
The estate tax rate is increased to 40%. This is a 5% increase from 2012 rates.
The Senate did not vote to extends the 2% payroll tax reduction that has been in place the last two years. This means that the social security tax on the first $113,700 of wages will return (on the employee side) to 6.2%.