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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.

You also can follow me on Twitter @taxtweet.
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50 Comments
Henry
January 04, 2013 at 6:18 am

You can always tell when Obama is lieing his lips move, He said no tax rise for midle class, Isnt 2.3% a tax rise? Maybe that was to pay the $7 million for the cost of his vacation for him and his wife, He has never earned a vacation as he is on one all year .

DeWayne
January 04, 2013 at 5:00 am

It is not the tax 'rate' that will determine the 'filthy rich' progressive tax they will pay, it is instead terminating the many 'legal tax loop holes' that need be eliminated, before the 'filthy rich' will be found paying their "FAIR SHARE".

Sikn Tired
January 04, 2013 at 1:37 am

"But most of the rest of us will not see changes in our income tax rates" So, those making under $400K won't see a rate change....what about all the other taxes that are going up, making our paychecks go down?

Social Security tax is going up almost 50%, from 4% to 6% even though the big government socialists who started SS (and exempted themselves!) insisted it would never be more than 3% on your first $3000 (worth about $50K in 2012 dollars).

Obamacare taxes on low income seniors who could deduct medical expenses over 7.5% of their income now have to wait until that figure reaches 10% before they can start taking the deduction.

Obamacare taxes on medical and pharmaceutical manufacturers get passed on to all of us as higher cost, allowing politicians to demonize American companies for raising their prices. The manufacturer joins all of the other businesses moving out of the US. That's the way to keep Americans employed!

Another new tax is the limit on flexible spending accounts where people with disabilities could pay for their out of pocket medical expenses with pre-tax dollars. These accounts have been limited to $2500, effectively taxing people with special needs/disabilities whose bills run 3 to6 times that amount annually. If you have a high deductible insurance policy (i.e. you can only afford catastrophic coverage because you are low income), you lose the tax break like the seniors above, AND lose the tax benefit of the HSA.

For those making $200K (half of the $400K number promised!) are going get the 3.8% (dare I say, Obamacare tax?) increase on capital gains and dividend income that they may have in mutual funds, or other investments for retirement. 15% to 18.8% is a 25% increase in taxes. If you make a gain on your house when you sell it, guess who's going to claim a larger piece of your nest egg if that gain puts you over the $200K mark! But it's OK, that money will be thrown down the same bottomless pit that your SS money has been thrown into!

Keep beleiving the liberal infested news outlets, entertainment outlets, teachers unions, etc., and they will continue to separate idiots from their money while blaming those who are trying to end the cycle.

Tom
January 04, 2013 at 12:35 am

Why was the 98 % of the rest of the people taxes raised? The congress and President obama signed into law the 2% social security tax the expired and we are also paying more. What happend to keeping the middle class taxpayers from not paying more?

Dan
January 04, 2013 at 12:32 am

If you believed for one second that even one politician was going help the middle class, your a fool. All they want to do is look like they are doing sonething.

But infact anyone making over $200,000.00 a year is smart enough to know how to not pay taxes or very little. More you make the more write off there are for you.

What we need is very very simple, but we would lose some jobs over it. This is my plan and it will work very well. A flate 10% federal tax, with NO deductions, NO write offs period.

What will happen, first the I.R.S. would close and save millions. We would need less politcian and save billions,the left will less to do and we can cut their pay and save millions more.

This make sound crazy, but it would work. Problem with is every politician will fight this, because they get rich off of tax bills.

Dan

Connie
January 03, 2013 at 11:35 pm

How is all of this helping the middle class. The entire campaign was focussed on helping the poor and middle class the social security tax of an additional $1,000 per year being deducted is not helping an average of $80.00 per month taking away money for a bill to be paid, or food from my table, so i won't have to be a statistic and need food assistance. If your not going to help the middle class, please don't hinder us.

Spike
January 03, 2013 at 11:20 pm

I understood that Obama wasn't going to raise taxes. I am not even in the middle-class as you call it I am below that. The rich worked hard for their money so why should they be punished.
Does this include all the rich people in congress? Why can't we get more of a raise on our Social Security for cost of living. What we do get Medicare takes that away. There are a lot of people that paid into Social Security me included and we have that as our only income. That is pure poverty. There are people that pass away and that money goes back into Social Security. More for our Goverment to spend. What a shame.

Sean
January 03, 2013 at 10:56 pm

I wonder if Ms. Bell fails to address the issue of social security because of a quid pro quo that her company worked out with the administration? I wonder if the recent appellate court decision that her company essentially lost has anything to do with it?

Klinko
January 03, 2013 at 9:42 pm

Why do you not mention the increase in social security tax from 4.2 to 6.2%? This has a major impact on the middle class incomes as the cutoff for paying social security taxes is somewhere around $115,000 (i.e., no social security taxes paid on income above about $115,000). Someone who makes $50,000 a year will now have to pay an extra $1,000 in taxes this year for Social Security; someone who makes $100,000 will pay and extra $2,000; someone who makes 10 million dollars per year will only pay a little over $2000 additional per year, not much more than the person who only makes $100,000 per year. The Democrats let this slip through. Why does the liberal medias insist on putting rose colored glasses on the American public reading the liberal media?

Samtul
January 02, 2013 at 1:11 pm

Dear Tax Specialist: Should the accrued interest on the five (5) year term deposit be reported and tax paid each year or it should be done on maturity when the principal with interest is realized into the account.

Is there a flexibility either pay tax on accrued interest each year or one time on maturity.

Regards,

Samtul