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Wealthy pay more under new tax bill

By Kay Bell ·
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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January 04, 2013 at 10:15 am

I guess the only thing I really have to add to Led's excellent response is that unfortunately the Democratic Party has created a population who actually do receive handouts (no, I'm not talking about SS Carol, relax). These days, it is not just the youth who have a sense of entitlement. Working two jobs should be rewarded, not penalized. Building a successful company and employing more Americans should be rewarded, not penalized. Making more money and paying an 'equal' percentage actually increases revenue for the Gov't ... with this reform and 'wealth redistribution' strategy we are going the ways of the Roman Empire ... down. Look what is happening in France people, the rich are not the enemy ... the envious are the enemy. Get off your A$$ and work to become rich ... don't just feel like you are entitled to it. P.S. I am not one of the RICH ... but I aspire to be and will take my money with me when I leave ... just like what is starting to happen in America.

Lori Davis
January 04, 2013 at 10:08 am

Could someone explain to me about the higher payroll taxes that they are taking from our checks.. I have heard several differnt things..What figure did they use? Is the percent the same for everybody. Is this temporary?

January 04, 2013 at 10:04 am

Led, excellent response!!!

bob m
January 04, 2013 at 9:34 am

the 6.2 to 4.2 had nothing to do with bush tax cuts
lets get the rigt facts

January 04, 2013 at 9:20 am

Where to start, let's go with Frank. Obviously you didn't spend any money learning to spell, it should be GREEDY. Most of the jobs shipped out of this country were the result of GREEDY unions and lazy union workers who want to get paid for doing as little work as possible. As far as the rich paying their share let's say a family earned $1,000,000 a year, they would pay about $345,000 in taxes or about 34% in taxes sounds like more than there fair share to me.I agree that most SSI benefits are not handouts, but there are a whole lot of people who recieve benefits that never paid a dime into the system, disability comes to mind. Carol you paid into SSI for 60 years? That's a long time can't help but wonder exactly when you started paying and how old you were when you started recieving benefits but according to recent Urban Institute calculations. A single women will come out ahead due to her longer life expectancy, likely netting $464,000 in lifetime benefits, which is $192,000 more than she paid into the system. These amounts are in constant 2010 dollars and assume a 2 percent real interest rate.I just don't see why people feel the rich don't pay enough in taxes, I mean even if they pay the same rate as you because they earn more they are already paying more. Why should they be punished for working and making more money. If you are jealous work harder, get better educated, work 2 jobs. I currently work 2 jobs so should I have to pay more taxes simply because I make more money working twice as hard? Get real, pay your own way and stop depending on the government and other people to take care of you, because it's not thier responsibity.

harry abolini
January 04, 2013 at 9:16 am

I agree that the rich need to be soaked - in oil and then burned alive!

January 04, 2013 at 8:38 am

It's about time these millionairs pay their fair share. To Rosalinda, I have paid into SS for 60 some years and have never received any hand outs as she refers to. I am now retired and this SS I receive is mine as I have paid in dearly and will never receive even half of what I paid in unless I live to be 160 which we all know is not going to happen, watch the generalarities in your comments.....

Phil Scott
January 04, 2013 at 8:28 am

@ Rosalinda....Handouts? What flip are you talking about? Every time I get a paycheck there is a section where it list "DEDUCTIONS". D-E-D-U-C-T-I-O-N-S. In the "deduction" section it ALWAYS shows an amount for Social Security. The "deduction" is money that is taken from me that I hope to at least get a small portion back when I retire. Let's see....if I pay in for 50 years, I will only actually get back a small portion simply because I will not live long enough to get back what I paid in. So, PLEASE wise woman, go ahead and explain to me, (and everybody else for that matter) how this is a handout. You're an idiot.

Rosalinda Morgan
January 04, 2013 at 7:42 am

The increase in social security tax from 4.2% to 6.2% is to fund the social security so we have enough money to pay the handouts. The 6.2% was the old rate before the Bush tax cuts so we are just going back to where it was. I have to agree with Dan that the best solution is 10% flat tax, no deduction.

Frank Bakis
January 04, 2013 at 6:57 am

Its time the rich pay there dues. They shipped our jobs overseas to make bigger profits. They have been protected by the GOP long enough. Stop them from putting there money in overseas accounts. Example: Romney They are called the GREADY AMERICANS. You see overseas all the country revolting. It will happen in this country soon. Its time our goverment wakes up. The gop is destroying our country. This has turned into a class war. The rich against the poor. PLEASE WAKE UP AMERICA