On Dec. 31, 2012 Washington hammered out a last-minute agreement for tax deals to avert the looming fiscal cliff.
A collective sigh of relief could be heard by taxpayers even though Congress did not fix spending cuts.
Now as we begin gathering documents for the April 15 tax filing date, there are new tax laws from the fiscal cliff deal that will affect everyone.
One immediate thing that will be noticed is the Internal Revenue Service (IRS), thanks to the last-minute changes, is processing tax returns at a slower rate.
But it doesn't mean you have to delay things.
U.S. President Barack Obama has said that 98% of Americans will not see their income taxes go up – but take a look to be sure, because there is something for everyone in here.
Your Fiscal Cliff Deal Tax Changes for 2013
First, here's some good news from the tax changes:
- Being married isn't a bad thing! Couplesstill have the standard deduction that's twice that of individuals. For the 2012 tax year, this standard deduction increased to $6,100($12,200 for married couples filing jointly), a rise from $5,950 ($11,900 for married couples filing jointly).
- Many middle-class taxpayers will be protected from the alternative minimum tax (AMT)as the income exemption level will now be permanently adjusted for inflation. This means taxes will be less for the 60 million Americans that would have impacted.
- For homeowners who were either granted principal forgiveness or underwent a short sale or foreclosure, they will not have to pay tax on the forgiven debt amount with the deal's one-year extension.
But, here's where you got hit:
- Say goodbye to the two-year payroll tax holiday. It has expired and now employees' net pay is down two percentage points as 6.2% of Social Security will be taken out of paychecks versus 4.2%. There is $113,700 wage ceiling so any wages over that will be exempt.
- A worker with a $41,000 salary – the national average–will have $32 less in a biweekly paycheck, reported CNN.
- High-income earners – $400,000 and higher (individual)/ $450,000 (married filing joint) – will see their tax bracket rise from 35% to 39.6%. But this does not impact 2012 income tax returns.
- Also, these high earners will now pay a 20% capital gains rate, up from the previous 15% rate and a new 3.8% surcharge from the Affordable Care Act.
- Individual taxpayers making $250,000, the head of the household earning $275,000 and married couples filing jointly and earning $300,000 will now have limits on personal exemptions and itemized deductions.
- For those with $422,500-plus income, they will not qualify for a personal exemption.
- The estate taxes exemption stays at $5.12 million but it will now be calculated with inflation. The top tax rate increased to 40%, up from 35% for those in the highest income bracket.
Fiscal Cliff Deal Didn't Change All Taxes
These got extended:
- State and local sales taxes can be deducted from your filing.
- Teachers can receive a $250 break from school supply expenses.
- Eligible college students can deduct tuition and other education-related expenses from their income.
- Individual Retirement Account holders older than 70.5 can make tax-free distributions for charitable purposes.
- Family tax breaks for lower income families have a five-year extension. This includes the American Opportunity Tax Credit (a partial refundable credit up to $2,500 annually for four years), the Child Tax Credit ($1,000 can be claimed for a child younger than 17 with a partial refund) and the Earned Income Tax Credit (working Americans with either low- or moderate-incomes can receive a credit).
- Mortgage insurance premiums can be deducted as mortgage interest.
Related Articles and News:
- Money Morning:
Taxmaggedon 2013: These Changes Mean Less Take Home Pay For Everyone
- Money Morning:
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- Fox Business News:
Tax Law Changes You Need to Know for 2013
Your taxes under the fiscal cliff deal