By Peter Watts
After months of inaction and accusations, Congress took action in the early morning hours of January 1 to preserve many tax cuts, referred to as the-Bush era tax cuts, as well as to extend many of the lapsed tax provisions.
Oregon's congressional delegation was split on the bill, with Representatives Kurt Schrader and Earl Blumenauer voting against the American Taxpayer Relief Act and Susan Bonamici, Peter DeFazio, and Greg Walden voting in favor.
Some highlights from the bill are as follows:
Tax Rates for Individuals
The individual marginal tax rates (10%, 15%, 25%, 28%, 33%, and 35%) were retained, although a new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately). The income levels subject to the 39.6% tax increase was a compromise, with the White House pushing for a lower threshold and House Republicans pushing for a higher threshold.
Itemized Deductions and Personal Exemptions
Personal exemptions and itemized deductions phase-outs were reinstated at a higher threshold. The threshold rates are $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly. This does not change the threshold at which people should itemize, instead of taking the standard deduction. The itemized deductions begin phasing out when taxpayers have income over these higher levels.
Alternative Minimum Tax
The dreaded Alternative Minimum Tax exemption amounts have been permanently indexed for inflation. For tax year 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Fortunately, relief from AMT for nonrefundable credits is retained. The AMT is a very complex calculation. Long story short, if you earn more than the listed income, you add specific deducted amounts back into your taxable income calculations.
Capital Gains and Dividends
A new 20% rate for capital gains and dividends applies to individuals in the top income tax bracket (400,000 singles, 425,000 heads of households, 450,000 married filing jointly and 225,000 filing separately). The 15% rate is retained for taxpayers in the middle brackets, while taxpayers in the 10% and 15% brackets continue to enjoy the zero percent rate.
Estate and Gift Tax
In one of the more surprising compromises, the estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.25 million in 2013). However, effective January 1, 2013, the top estate tax rate increases from 35% to 40%. This allows a couple to pass up to $10.5 million tax free, either as a gift, or at death, if properly structured. The new rate is subject to change.
Although Congress took action on many matters, the American Taxpayer Relief Act was not the grand compromise that many had hoped for.