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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
Cynthia G.
January 08, 2013 at 1:29 pm

We always seem to need someone to blame...but truth of the matter is that we are all at fault. No one wants to pay "any" taxes, yet we expect the government to fund roads and highways, natural disasters, our elderly, our schools, our military and other protection agencies, and so much more. I pay a lot in taxes every year and I'm not rich. All I want is to pay my fair share and for all of us to find ways to eliminate waste and fraud. It's not up to congress or the president to do it (or be blaimed for its failure to do so). Our problems didn't start with them, and sure won't end with them. It's up to us. We can conserve energy, recycle, eat healthy and exercise, spend time building loving homes so that our children have the best opportunity to be good, healthy, responsible citizens (we seem to just be concerned with leaving them debt, but there are greater problems that future generations will deal with), help the needy and our elderly through volunteerism, donate to find cures for diseases, and report waste or fraud if we encounter it on our jobs. These are things that we can do.. and if we figured out how to do it right, we'd bring down the cost of social programs, and everything else that impacts taxes.

JD86
January 05, 2013 at 1:16 pm

JUST A SPOON FULL OF SUGAR MAKES THE MEDICINE GO DOWN.... The way this article is written is comical. America has voted to PUNISH the successful and they got what they wanted. But their too busy portraying themselves as victims and unlucky to realize this affects everyone. Including them. Wait and see how small business owners react to this and Obama Care when it goes onto full swing. Everyone and I mean everyone will pay for this. The middle class will continue to shrink and the masses become more dependant on the government. History has shown us that our government cannot manage money and seldom spends tax dollars on what they claim to be taxing us for. Politicians are only good at one thing and that is getting elected. It is time to vote every incubant out of Washington. This means both partys. None of those criminals are working in our best intrest.

George
January 05, 2013 at 1:13 pm

We are all accountable, we need to stop the waste of dollars going to people who don't need it and that's at every level of our socio economic makeup. Fraud costs all of us, paying more taxes isn't the problem reducing waste is, we continue to support countries who spit on us, politicians whose goal is reelection, and point fingers at both parties. Originally politics was a volunteer position. When we return it to that you will have politicians that want to make the country better

walt
January 05, 2013 at 12:10 pm

Hey, Winnie--

The signature on the bottom of the tax increase bill is that of
the man sitting at 1600 Penn. No signature, no bill!

walt
January 05, 2013 at 12:08 pm

It seems that any comment that is anti-Obummer doesn't make it to the big screen.

Tom
January 04, 2013 at 8:01 pm

Blah Blah Blah
Whine Whine Whine

Cheese Anyone?

John E. Jones
January 04, 2013 at 7:28 pm

I once was in the middle class now I`m in the lower class but hey guess what? I learned to survive on what we have & we do it verry well. All of our bills are paid, we have A roof over our heads,plenty of food& a pretty good car. I ask over& over where does the middle class start? Around 50,000 A year is the best answer I got.That for a family of 4 divided by 4 is 12,500Ayr. per person. They can`t live on that?Give me A break! I can`t realy feel sorry for these socalled middleclass people.

enufalready
January 04, 2013 at 4:33 pm

blame blame blame point point point. Everyone needs to step up; no one is w/o fault. What I'd like to see is any politician independently wealthy forgoe the salary; its not needed, in addition to the perks and slush funds disguised as conferences, misc, etc. No more voting themselves salary increases and term limits. No more pork projects like they put into this bill. I'd like to see the President NOT SPEND millions for vacations when the American people whose money it is are losing their homes, trying to figure out how to feed their families and can't go on vacation. I'd also like to see us cut foreign aid --- we're bankrupt, we have major problems, which we need to fix otherwise there'll by nothing for anyone. I'd love to see them televise these meetings, as we THEIR EMPLOYERS have a right to know where every penny is going. It would be interesting than to see them try he said she said. That's a start with our politicians doing the right thing for America and its people.

enufalready
January 04, 2013 at 4:26 pm

People are blind and also deaf. Obama is the one that for the last four years and during the entire campaign has stated that come hell or high water he was going to increase taxes. Had you bothered to listen you would have heard his goal was to increase taxes across the board. He just doesn't get finances, economics nor does he care about the middle class. First thing that should have been done...just as we would do were we to find ourselves in this mess...BEFORE coming to us, his employers for more of OUR money....was to CUT OVERSPENDING AND WASTE not to mention the errors that cost US millions/billions.

Winnie
January 04, 2013 at 3:41 pm

People are so blind. Obama did not increase your taxes, Congress did. He tried his best he did not lie. The GOP don't want to pay taxes that they should pay, but they want the middle class to pay and keep the US moving in the right direction. Congress needs to be OVERHAULED, because some of them has forgotten who put them in Office. They are not looking out for the Country (America), they are looking out for one and only. GOP need to consider Middle Class people of the United States as well as the Lower Class. They were elected to serve everyone.