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Wealthy pay more under new tax bill

By Kay Bell · Bankrate.com
Wednesday, January 2, 2013
Posted: 7 am ET

The new year is not starting off very well for wealthier Americans.

Just two hours into Jan. 1, the Senate approved a "fiscal cliff" tax bill that raises a variety of taxes on higher earners for the first time in 12 years. Then as the first day of 2013 wound down, the House passed the same bill, formally known as H.R. 8, the American Taxpayer Relief Act of 2012.

As soon as President Barack Obama signs the measure, the top income tax rate will go up to 39.6 percent. Many people in that tax bracket also will face higher taxes on their investment income, as well as a reduction of their personal exemption amounts and itemized deductions.

But most of the rest of us will not see changes in our income tax rates.

Even better, some popular tax breaks that had expired were renewed.

Better still, the sunset provisions of the 2001 and 2003 tax laws were erased from the books. That means that tax provisions we've grown used to over the last decade-plus will continue to be around without worry about when they will expire.

Here are some of highlights of the American Taxpayer Relief Act of 2012.

Tax rates

The top tax rate of 39.6 percent will apply to single taxpayers with adjusted gross income of more than $400,000 a year and married joint filers making more than $450,000 annually. Taxpayers making less than those amounts will continue to have their income taxed at the existing 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent rates.

Exemptions, deductions cut

Taxpayers who make more than $250,000 (single), $275,000 (head of household) and $300,000 (jointly filing couples) will lose some of the value of their personal exemptions and itemized deductions. The personal exemption phaseout, or PEP, will reduce affected taxpayers' exemption amounts by 2 percent. The Pease phaseout, named after former Ohio Democratic Rep. Donald Pease who pushed for the law in 1990, will cost higher-income taxpayers 3 percent of their Schedule A claims.

Investment income taxes

Beginning in 2013, the top tax rate on capital gains and qualified dividends is 20 percent for single taxpayers earning more than $400,000 a year and married jointly filing couples making more than $450,000 annually. For taxpayers who make less, the top tax rate on these investments remains at 15 percent. And those in the bottom two tax brackets (10 percent and 15 percent) would continue to owe no capital gains taxes.

Extenders extended

Most of the tax breaks that expire every year or so and are extended, earning them the name extenders, were renewed retroactively for 2012 as well as for 2013.

That means that on those years' tax returns eligible filers can claim the above-the-line educator expense, higher education tuition and fees and student loan interest.

The itemized state and local sales tax deduction also was renewed.

Certain homeowners can continue to claim private mortgage insurance, or PMI, as an itemized interest deduction. And eligible homeowners who have mortgage debt canceled or forgiven won't have to report that amount as taxable income.

Special tax provisions get longer life

Some key programs that were part of the 2009 Obama stimulus were approved for an even longer time, through the 2017 tax year. They are the American opportunity education tax credit that replaced the hope tax credit and the expanded earned income tax credit, or EITC.

The child tax credit, which now will remain at $1,000 and was made refundable for more parents under the 2009 law, also is in place for five years.

Alternative minimum tax

For years (and years and years) taxpayers who might face the alternative minimum tax have anxiously waited for Congress to increase the income amount that is exempt from the tax. The new fiscal cliff tax bill sets the 2012 amounts at $50,600 for single filers and $78,750 for married taxpayers. These amounts now will be indexed annually for inflation, meaning no more waiting for Congress to act.

Estate tax

The estate tax was scheduled to apply in 2013 to estates valued at more than $1 million. Under H.R. 8, that amount will be $5 million, but the tax rate on estates worth more than that will be taxed at 40 percent instead of the current 35 percent. This also is a permanent tax change.

As I mentioned, these are some high points in the bill. The 157-page document keeps plenty of other tax provisions in place. Bankrate will detail those throughout the 2013 tax filing season, both those that will affect your 2012 return due by April 15 as well as those you can use to minimize your 2013 tax bill.

Want the latest news on taxes, tax reform prospects, filing deadlines, Internal Revenue Service alerts and tax-saving tips? Subscribe to Bankrate's free Weekly Tax Tip newsletter.

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50 Comments
Cliff
January 08, 2013 at 6:38 pm

This is for Dr. Don.
I'll chip in for you to move out of the U.S.A.
Then you can see what you get from their Government.

Bob
January 08, 2013 at 3:46 pm

Dave R. - That would be "intellect" not "intelect".

Dr Don
January 08, 2013 at 3:22 pm

TO DAVE R.
It's not the taxes that have become "an insatiable beast", It's the crooked politicians.

Dr Don
January 08, 2013 at 3:17 pm

The results of charging a $5 Million dollar estate 40% will surely cause most of the wealthy to leave the USA. In fact, they are moving out very quickly, right now. Who do you suppose is going to fund your jobs ? The Govt !!! If I had a 5 million dollar estate, and knew I was going to have to pay 40% of five million, I would be looking to Panama, or countries that charge a realistic amount of taxes, not "robbing" me because I succeeded in the financial world !!!

Dave R.
January 08, 2013 at 3:04 pm

It's a little bit frightening how many of the people that have posted comments on this article have a difficult time with spelling and sentence structure. I occasionally view the comments on these articles to get a glimpse at the caliber of intelect that would take the time to leave one. I someday hope that the definition of fair taxation would mean that we all pay the same amount for the services provided. Not the same percentage of income or worth. The actual dollar amount that it costs,divided by the number of those needing the service, infrastructure etc. When we reach that point, we can then claim we have a fair tax system. Property, sales and income taxes have become an insatiable beast that never feels full.