By Shanna N. Yonke
January 2, 2013
Congress passed the American Taxpayer Relief Act of 2012 overnight. President Obama has not yet signed the bill into law, but he is expected to sign the bill as proposed.
The bill proposes some increases in tax rates, but the changes are not as significant as they could have been if Congress had failed to reach this deal. The highest tax bracket for ordinary income, including wages, interest, and rental income, will return to 39.6% for taxable income in excess of $400,000 for a single person or $450,000 for married persons filing jointly, in place of the former highest bracket of 35%. In addition to the tax increase for ordinary income, the payroll tax will revert to 6.2% for all wage earners in place of the former tax holiday rate of 4.2%.
The tax rate for dividends and capital gains will increase to 20% for taxable income in excess of $400,000 for a single person or $450,000 for married persons filing jointly, in place of the former flat rate of 15%. Dividends and capital gains up to those threshold amounts will continue to be taxed at the rate of 15%. In addition, the Patient Protection and Affordable Care Act add-on tax on net investment income will be 3.8% on the lesser of (1) a taxpayer’s net investment income, or (2) the taxpayer’s modified adjusted gross income in excess of $200,000 for a single person or $250,000 for married persons filing jointly. The add-on tax applies to unearned income, including interest, dividends, annuities, royalties, and rents. The add-on tax does not apply to earned investment income, such as distributions from individual retirement accounts (IRAs).
The highest tax bracket for estate tax will increase to 40% in place of the former rate of 35%. The gift, generation-skipping, and estate tax exemptions will remain at $5,000,000 (adjusted for inflation to $5,120,000 in 2013).
This bill avoids the return to pre-Bush era tax rates, including the application of ordinary income tax rates to income from dividends and capital gains, an estate tax rate of 55%, and a decrease in the gift and estate tax exemptions to $1,000,000
If you have questions regarding the above, please contact attorney Shanna Yonke, the author of this article, or any of the attorneys in the Trusts & Estates Practice Group of Ruder Ware.
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