By now we’ve all heard that Congress averted the Fiscal Cliff. Or did they?
Effective with the first payroll of 2013, there are a number of changes to paychecks for employees. The American Taxpayer Relief Act of 2012 (“Relief Act”) was passed by the United States Congress on January 1, 2013, and includes several changes to tax laws affecting payroll and employment tax administration in 2013. These changes immediately impact paychecks.
The American Taxpayer Relief Act of 2012
Simply referred to as “The Relief Act”, the following extensions and adjustments were passed by the United States Congress on January 1, 2013:
- Maintains the 10%, 15%, 25%, and 28% income tax brackets from the Bush tax cuts permanently
- Retains the 33% and 35% income tax brackets from the Bush tax cuts for taxable income under $400,000 (single), $425,000 (head of household), and $450,000 (joint filers). Imposes 39.6% tax rate on income above this level
- Phases out personal exemptions and limits itemized deductions for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers)
- Capital gains tax and dividends tax will be 0%, 15%, or 18.8% for lower income levels, 20% for taxpayers with income over $400,000 (single) and $450,000 (joint filers) as well as a new 3.8 percent health care tax on investment income above $200,000 (single) and $250,000 (joint filers)
- Continues setting the standard deduction for joint filers at 2x single filers
- Permanently sets Alternative Minimum Tax (AMT) exemption at $50,600 (single) and $78,750 (joint filers) for 2012 and adjusts for inflation thereafter
- Raises estate and gift tax to 40 percent, but above the current exemption level (~$5.12 million) and adjusts for inflation in future years
- Permits 401(k) plan participants to convert their plan to a Roth plan, under which contributions are taxed going in but withdrawals are tax-free. The result is a short-term revenue boost now and more tax-free savings accounts
Set to adjust/expire in the next few years
- Extends American Opportunity Tax Credit (education) through 2017
- Retains the doubled child tax credit ($1,000) permanently, its refundable portion through 2017, and the expanded earned income tax credit (EITC) through 2017
- Extends existing agricultural programs for one year (preventing the “dairy cliff”)
Yeah, I had to look up the Dairy Cliff thing myself.
Effecting all employees as of right now
- Ends the 2% Payroll Tax Holiday. Taxpayers should expect greater FICA withholding from their paychecks starting in 2013.
People are calling this a tax hike. It is the expiration of a tax “holiday”, so we can’t call it a tax hike any more than we say that JCPenny hiked the price of shoes up because the sale ended last week.
Most employees have already seen a $30, $50, even $70 drop in their paycheck already.
- The Relief Act postpones sequester by two months, which will now occur on March 27, 2013
- No action on the debt ceiling. The U.S. hit the debt ceiling on New Year’s Eve, although Treasury actions to juggle books and defer payments will forestall default until late February.
What this means is we’ve pushed off true reform and are going to have to face this again!
Confused? Support a simpler solution
I’ve done tax preparation for H&R Block before. It was an incredible experience and I found I love doing taxes.
I also learned that our tax code is too complex and is not effective. There are too many ways people can cheat the system and not pay their “fair share” of income taxes.
I support a simpler, cheaper, more effective solution: The FairTax
The FairTax will do away with:
- The need to file a tax return, saving you money on software or hiring someone to deal with your tax return
- Offer benefits to lower-income and no-income Americans
- Tax everyone the same – even foreign visitors and those in our country illegally
I’ll be doing an episode on this in the future (don’t hold your breath). In the meantime you can attend a free Webinar held by FairTax supporters on January 27, 2013: Register for the FairTax webinar
I’m Steve Stewart and I approve this message.