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Fiscal cliff tax changes explained

BY HOWARD KLEIN

A widely discussed subject over the last several months has been the fiscal cliff, which would have imposed automatic across-the-board government spending cuts and dramatic tax changes affecting individuals, businesses and estates. The extent of these changes would have resulted in unprecedented tax increases for most taxpayers.

On Jan. 1, Congress passed HR 8, the American Taxpayer Relief Act, which will prevent many of the tax increases that were scheduled to go into effect this year while at the same time retaining many of the scheduled tax breaks that were set to expire. The law does raise income taxes for those considered high-income individuals while slightly raising estate and gift tax rates.

Some key provisions of the new law include:

Income tax rates: For tax years beginning after 2012, the income tax rates for individuals will stay as they were in 2012, but with a new 39.6 percent rate applying to joint filers and surviving spouses with incomes above $450,000, $425,000 for heads of household, $400,000 for single filers, and $225,000 for married taxpayers filing separately. These dollar amounts are inflation-adjusted for tax years after 2013.

Capital gains and dividends: For tax years beginning after 2012, the top rate for long-term capital gains and qualified dividends will rise to 20 percent (up from 15 percent) for married taxpayers with incomes exceeding $450,000 ($400,000 for single taxpayers). Taxpayers whose income is below those thresholds will be eligible for the 15 percent rate, while certain lower-income taxpayers will be eligible for a zero percent tax rate. In addition to the capital gains changes, there is a new 3.8 percent surtax on investment-type income and gains for higher income tax payers.

Personal exemptions: For tax years beginning after 2012, the Personal Exemption Phaseout, which had previously been suspended, is reinstated with a starting threshold for those making $300,000 for joint filers and surviving spouses, $275,000 for heads of household, $250,000 for single filers, and $150,000 for married taxpayers filing separately.

Itemized deductions: For higher income taxpayers, the total amount of itemized deductions may be limited.

Estate and gift taxes: The law prevents steep increases in estate, gift and generation-skipping transfer taxes that were slated to be effective for individuals after 2012 by retaining the exemption level at $5,000,000 (as indexed for inflation). However, the law also increases the rates on these taxes from 35 percent to 40 percent. The law continues the portability feature that allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse. The annual gift tax exclusion has been increased to $14,000.

Alternative Minimum Tax (AMT): The law also provides alternative minimum tax relief. Prior to the law, the individual AMT exemption amounts for 2012 were to have been $33,750 for unmarried taxpayers, $45,000 for joint filers and surviving spouses, and $22,500 for married persons filing separately. Retroactively effective for tax years beginning after 2011, the law increases these exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. In addition, for tax years beginning after 2012, it indexes these exemption amounts for inflation.

Social Security Payroll Tax Cut: The new law allows the 2 percent cut in payroll taxes that was enacted two years ago to lapse. Beginning in 2013, employees’ payroll social security withholding will increase from 4.2 percent to 6.2 percent.

Several business credits have also been extended. Some of these include:

• The research credit: modified and retroactively extended for two years through 2013.

• The new markets tax credit: retroactively extended for two years through 2013.

• Accelerated “bonus” depreciation: extended for one year.

The above list is by no means an entire description of all the changes in tax provisions which will be affected by the new law. Each taxpayer needs to make a careful analysis in planning for 2013 and beyond.

Howard Klein is a partner at Citrin Cooperman, where he is the practice leader of the trusts and estates group. Based in the firm’s White Plains office, Klein can be reached at (914) 949-2990 or hklein@citrincooperman.com. Citrin Cooperman is a full-service accounting and business-consulting firm with offices in White Plains, New York City, Norwalk, Conn., Springfield, N.J., and Philadelphia.

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