Tax Cliff Averted: Congress Raises Rates on Wealthiest, Extends Many Provisions

[ILLUSTRATION OMITTED] Pulling back from the fiscal cliff at the 13th hour, Congress on New Year's Day preserved most of the George W. Bush-era tax cuts and extended many other lapsed tax provisions. new law brings a multitude of changes affecting both 2012 returns and, for the new year, tax planning, withholding, and estimated tax payments, prompting many considerations for CPAs and their clients concerning implementation of the new measures. In addition, new taxes and provisions enacted in 2010 by health care reform legislation took effect Jan. 1. Shortly before 2 a.m. on Jan. 1, the Senate passed by a vote of 89-8 the American Taxpayer Relief Act of 2012, H.R. 8, which embodied an agreement that had been hammered out over the preceding two days between Vice President Joe Biden and Senate Minority Leader Sen. Mitch McConnell, R-Ky. House of Representatives approved the bill by a vote of 257-167 late that evening, after plans to amend the bill to include spending cuts were abandoned. President Barack Obama signed the bill Jan. 2. The AICPA is pleased that an agreement has been signed into law, said Edward Karl, vice president--Tax for the AICPA. Besides allowing the IRS and tax software providers to implement critically needed administrative plans and updates for the current tax season, the act should now enable taxpayers to make informed decisions and businesses to get on with their long-term tax and cash flow planning. AICPA has been working with our members to help them understand and implement these changes in the tax law We also will continue to closely follow tax-related developments as the next chapter in the legislative saga unfolds. act's impact on tax season was not immediately known. IRS issued a statement on Jan. 2 saying that it was assessing what effect the act would have. IRS released updated withholding tables on Jan. 3. With some modifications targeting the wealthiest Americans with higher taxes, the act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (EGTRRA), and Jobs and Growth Tax Relief-Reconciliation Act of 2003, P.L. 108-27 (JGTRRA). It also permanently takes care of Congress's perennial job of patching the alternative minimum tax (AMT). It temporarily extends many other tax provisions that briefly lapsed at midnight on Dec. 31, 2012, and others that had expired a year earlier. act's nontax features include one-year extensions of emergency unemployment insurance and agricultural programs and yet another doc fix postponement of automatic cuts in Medicare payments to physicians. In addition, it delays until March a broad range of automatic federal spending cuts known as sequestration that otherwise would have begun immediately Among the tax items not addressed by the act was the temporary lower 4.2% rate for employees' portion of the Social Security payroll tax, which was not extended and has reverted to 6.2%. Certain taxpayers also face higher taxes starting in 2013 as a result of provisions also described below that were enacted by the 2010 health care reform legislation. Here are the act's main tax features: INDIVIDUAL INCOME TAX RATES All the individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single fliers, $425,000 for head-of-household fliers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately). PHASEOUT OF ITEMIZED DEDUCTIONS AND PERSONAL EXEMPTIONS personal exemptions and itemized deductions phaseout is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly CAPITAL GAINS AND DIVIDENDS A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. …