Republicans and Democrats remained in session through most of the evening, working out a compromise that will help avoid the potentially disastrous “Fiscal Cliff” that so many had warned. Among the key changes are:
- Social Security Taxes- The tax holiday is officially over. The two percent reduction in the Social Security tax will end on January 1, 2013, returning the tax rate back to its 6.2 percent level. This will mean an immediate reduction in net pay for most all Americans.
- Marginal Tax Rates- As President Obama wanted, the marginal tax rates will increase on higher income- earning Americans. Originally, President Obama wanted to increase taxes on those earning more than $250,000 per year. A compromise was finally reached and taxes will be increased on those earning more than $450,000 per year if they are married filing jointly or $400,000 per year of they are single. The new, top margin will be increased from 35 percent to 39.6 percent.
- Estate Taxes- The tax on estates will rise from the 35 percent level of 2012 to 40 percent in 2013. The first $5 million will be exempted, so the tax increase will not be felt by the majority of Americans. The Obama administration wanted to lower the exemption to only $1 million, but agreed to the compromise position of $5 million in exchange for a higher tax rate. In addition, the exemption will be indexed to inflation.
- Investment Taxes- Capital gains and dividends exceeding $400,000 per year will now be taxed at a higher, 20 percent rate, which is 5 percent higher than in 2012.
- Alternative Minimum Tax- The dreaded AMT, which was designed to make sure everyone pays at least a minimum amount of tax, was on the table as a potential tax revenue enhancer that, if not reformed, would extend to millions more Americans and increase taxes sharply. As part of the fiscal cliff compromise, the AMT will remain the way it is and will now be indexed to inflation each year.
- Unemployment Benefits- Scheduled to expire soon, unemployment benefits will now be extended for another year to assist the chronically unemployed as they struggle to find gainful employment.
- Earned Income Tax Credit and Child Tax Credit- These two areas witnessed large increases back in 2009, but were set to expire in 2012. They have now been extended for five more years.
- 401K Conversions- Converting a traditional IRA to a Roth IRA used to carry many restrictions, but the new rules will relax these limitations, making it easier to convert. Moving a traditional IRA to Roth is a taxable event, so it makes sense from a tax revenue perspective to ease the restrictions.
The above are some of the important changes that will affect a large percentage of taxpayers. The deal is still not complete, as the U.S. House of Representatives has to vote on the changes, but most analysts expect the plan to pass the House and become law in a couple of days.
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