How the Fiscal Cliff deal affects your tax situation

The Fiscal Cliff deal Congress passed shortly after New Year affects your tax situation for both 2012 and 2013 (and beyond).  Here is a breakdown:

Income Tax Rates

The Bush era tax rate cuts enacted in 2001 and 2003 are permanently extended for single filers with taxable incomes below $400,000 and joint filers with taxable incomes below $450,000. For filers with taxable incomes above these thresholds, the top income tax rate will revert to the pre-cut rate of 39.6%. Essentially, a new tax bracket has been created.

Payroll Tax

The 2% Social Security payroll tax cut introduced in 2011 and remained in effect until December 2012 had expired, and the tax rate has been restored to 6.2% (from 4.2%). This Social Security payroll tax applies to income up to $113,700 in 2013, which means a tax increase of up to $2,278 per worker.

Alternative Minimum Tax (AMT) Patch

As explained earlier in this article, previously, exemption amounts for Alternative Minimum Tax (AMT) had not kept up with inflation over the years, and required Congress to pass a “patch” to raise the amount every two years or so. As part of the Fiscal Cliff deal, the patch with annual inflation adjustments has been permanently extended.

This patch affects the 2012 Tax Year and beyond.

Exemptions and Deductions Limits

High-income taxpayers will once again face reductions of their exemptions and itemized deductions based on their income levels. These Personal Exemption Phaseout (PEP) and limitation on itemized deductions were temporarily eliminated as part of the Bush era tax cuts.

Capital Gains and Dividends

The 0%/15% tax rates for long-term capital gains and qualified dividends have been permanently extended for single filers with taxable incomes below $400,000 and joint filers with taxable incomes below $450,000. Filers with taxable incomes above these thresholds will see their tax rates increase to 20%.

Unearned Income Medicare Contribution Tax

The additional 3.8% of Medicare tax for higher-income earners — individuals who earn more than $200,000 per year, $250,000 for joint filers — enacted by the Patient Protection and Affordable Care Act, commonly known as the healthcare reform law or ObamaCare, takes effect as scheduled in 2013 and has not been repealed.