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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
gloria
January 04, 2013 at 2:51 pm

If it weren't for the union my husband worked for, we would probably be on welfare. We have been good consumers because of good wages and healh benefits,therefore putting back into the economy and putting more people in jobs. It was the snowball that keep this country running until greed in higher management couldn't stand it that others were prospering in a smaller way. How blind they are; if the middle class fails,the higher the people are in our economy, we fall just as hard and even harder.

Paula
January 04, 2013 at 2:21 pm

I am amazed at the lack of understanding and short memory of so many people. As has been pointed out several times in previous comments, social security (FICA)has been withheld at 6.2% for many many years and matched with another 6.2% by employers. In an effort to stimulate the economy, Obama and Congress reduced the withholding rate to 4.2% for 2011, while employers still "matched" with 6.2%. They extended to tax reduction for 2012. With this new law, Congress allowed the rate to return to 6.2%. It is probably true that you can't give someone a gift and then take it away without being demonized.

I, for one, disagreed with the 2% reduction in 2011 and 2012. I am self-employed, so, from an individual standpoint, I appreciated the relief. But to take the money out of the social security system which is already in trouble just doesn't make sense to me. Yes, it might amount to $1,000 to $2,000 over a year but it is in such small doses that people didn't notice it when their checks increased. However, they will definitely notice it when their payroll checks go down.

Someone commented earlier on about paying tax at a higher rate if they sell their home. This idea has been spread around the internet through emails for several months. And it is true, IF you have a gain from the sale of your principal resident that exceeds $250,000 for single or $500,000 for married joint filers. In other words, the exclusion of gain is still in the law. So, unless you make a really good profit from the sale of your home - and who does that in the current housing market? - you won't pay tax on a gain when you sell your principal home.

My biggest pet peeve about this law is that Congress didn't take a stand and insist of spending cuts. Instead, they raised taxes and then spent the money on things like $70,000 to NASCAR.

In a progressive tax system, rates increase as income increases and I believe that is the correct approach. But if you just raise taxes so you can spend more, we aren't really getting anywhere, are we? And I don't believe for a minute that a flat 10% of gross income would stay that way - it wouldn't take Congress long to figure out that 10% isn't enough.

robertdo
January 04, 2013 at 2:20 pm

Yes

We had a president in history of USA never have before "Big Big
Lies to american peoples Yes Taxes wealthy only make a fair share

we are endure for ANOTHER 4 YEARS

OK

ROBERTDO

chuck
January 04, 2013 at 1:27 pm

The difference between Charles Ponzi and FDR is that Ponzi had to sell his scheme to individual suckers and could only do it on a limited scale before he ran out of new suckers willing to pay in to support the more senior suckers - who believed just as strongly as some of you - that THEIR early investment "entitled" them to their too-good-to-be-true payouts.

FDR only had to sell the same scheme to a simple(-minded) majority of the US congress with the added advantage of making the scheme not only legal, but mandatory. Ever since then, politicians have “learned” that getting themselves elected is easier if you play Santa Clause and make the electorate feel entitled to more benefits than they pay for. Most of them can’t do the math to figure out that the lottery is a regressive tax which only applies to those who are really really bad at math. Social Security is in trouble because the majority of the electorate doesn't want to be told their “entitlements” cost more than they paid in.

For those doubters wanting things explained to you: take your annual social security statement which confirms how much you paid in. Check that against your old W-2’s and pay-stub D-E-D-U-C-T-I-O-N-S and notify SSA of any errors you find (but you probably won’t.) Divide that by the benefit you currently receive or are told in that statement you will receive at normal retirement age. Mine comes out to a relatively low 63-month payback period if I start collecting early at age 62; 47 months if I wait until full retirement age at 66. An average 65 year old is expected to live 19 yrs to age 84. So if I start collecting at age 62, I’ll recover my investment by age 67 and will be “entitled” to another 14 years of what amounts to "free-handouts."

I'm 60. I'm going to get mine. It's the 20-somethings who are going to be left holding the bag.

Dennis BUrton
January 04, 2013 at 1:17 pm

What prevents the very rich from moving their money overseas or in off shore accounts to prevent taxation?

John
January 04, 2013 at 11:51 am

On the campaign trail, Obama claimed unequivocally that no middle class taxes, payroll taxes or capital gains taxes would be increased. Yet now I will see my taxes increase by over $2000 a year based on the increase in the payroll tax. The dude has not even been sworn in and he is in my pocket for two grand. Lies, lies and more lies...

Lori Davis
January 04, 2013 at 10:49 am

I thought that was the only reason Americans worked was for a paycheck. As far as Union workers, they are no differnt than the rest of working Americans wanting to make more money. How would you like to be making what those jobs overseas are paying. We all gain from going to work for a company including the company and while some may gain satisfaction for what they do for their company and others may not ,we all do it for the same thing,a paycheck. Instead of trying to make these companies work in AMERICA and calling your self an AMERICAN they take their company to a poor country where they can take advantage of those people who need a paycheck as well. I do not work for a company represented by the union but I know people that do and they work theyre ass off. I agree with Frank on his comment..Along with the all the loop holes and advantages they have had with the market..This has been long overdue.

Jack W
January 04, 2013 at 10:34 am

Frank Bakis' comments place him squarely within one of two camps of understanding. He has no comprehension of the facts or he completely understands and is simply another Socialist Democrat. I am not in the top 1,2,5 or ten percent of America's wage earners and I am not a member of the GOP. The groups targeted by the Socialist already pay more of the U.S. tax burden than the rest of the entire taxpayers combined. They shipped their jobs overseas to stop the federal government from taking 39% of their profit for corporate taxes and then hosing them another 39% for personal income taxes. That does not include all of the other taxes, state, local etc. At no time when taxes have been raised on the wealthy in America has the amount of revenue collected by the IRS increased,it has always decreased. If you did not read the last sentence read it. If you did read it, read it again. Britain raised the taxes on the top earners in England in 2010. Tax revenues declined dramatically! If The government were to take every cent of America's wealthiest, about $619 billion in total assets it would only pay the interest on our national debt for about six months. So, if you have not understood the magnitude of the problem facing us before now, awake. We do not have a tax collection or tax fairness issue in America as the president or his Democratic party henchmen would have you naively believe. They, have spending and credibility issues. Remember that the rich are the most mobile group of America's earners. They can and will relocate to the more tax friendly nations should the government becomes too greedy, as they just have. So, when they decide enough is enough see how much taxes it will take from those now paying no taxes and those paying a very small portion of the taxes to compensate for what the wealthiest Americans are already paying. Only then will either your lack of information or your ability to fully comprehend become evidential.

dave
January 04, 2013 at 10:31 am

led as for your comment to LAZY UNION WORKERS, i am a member of one of the construction unions and if your not producing they can and will get rid of you very quickly. i worked non union construction for 14 years and you have the same people there, the problem is when person job is based on seniority rather than what you produce is one thing that needs to be changed.

WE DONT NEED TO GET RID OF THE UNIONS THEY NEED TO BE OVERHAULED

SCA
January 04, 2013 at 10:19 am

Lori, I think you are referring to the additional 2% that is going to be taken out of your paycheck. The rate has always been 6.2% but for the past years (not sure how many) we have had only 4.2% taken out ... the 2% reduction was never technically 'permanent'. The new 'deal' added the 2% back into deductions.