On January 2, 2013, the Taxpayer Relief Act went into effect and prevented the country from going over the fiscal cliff. In a previous article, I outlined the provisions from this Act regarding estate taxes. This article will address some of the major provisions of the Act.
Income Taxes: The Act permanently leaves in place the six individual income tax brackets ranging from 10 to 35 percent for married taxpayers earning taxable income below $450,000 and unmarried taxpayers earning below $400,000. However, for taxpayers earning taxable income above these thresholds, the tax rate is 39.6 percent.
Payroll Taxes: The Act does not extend the payroll tax holiday. In 2011 through 2012, the Social Security payroll taxes withheld were reduced from 6.2 percent and 12.4 percent to 4.2 percent and 10.4 percent. This reduction did not carry through and the rates have been returned to the pre-2011 rates.
Capital Gains Taxes: The capital gains tax rate of 15 percent remains in place for income from qualified dividends and long term capital gains for married taxpayers with income below $450,000 and unmarried taxpayers with income below $400,000. The capital gains tax rate increases to 20% for taxpayers with income above these thresholds.
Marriage Penalty Relief: The Act keeps in place the previous tax relief providing a standard deduction for married taxpayers that is twice that for an unmarried taxpayer.
Family Related Provisions: The Act keeps in place the $1,000 child tax credit. It also maintains the $10,000 tax credit for qualified adoption expenses. That Act retains the tax credit for employers that acquire, construct, or expand property uses for a child care facility. That Act also keeps in place a 35 percent dependent care credit for eligible child care expenses for children under the age of 13 and disabled dependents.
Education Tax Relief: The Act retains the $5,250 annual employee exclusion for employer-provided educational assistance and the student loan interest deduction provisions.
Mortgage Tax Provisions: The Act allows for taxpayers to continue to deduct premiums for mortgage insurance as qualified residence interest. It also allows a taxpayer to exclude from income up to $2 million in cancellation of indebtedness income from the forgiveness of mortgage debt on a principal residence.
Estate and Gift Taxes: The Act permanently sets the unified estate and gift tax exemption amount at $5 million; however, the taxable rate for estates over $5 million increases from 35 percent to 40 percent.
Editor’s Note: Melanie B. Bradford is an attorney located in Scottsboro, Alabama at 803 Garland Ferry Road at the intersection of Veterans Drive and Garland Ferry near The Daily Sentinel. Her phone number is 256-259-3301. The Alabama State Bar requires any communication that may be interpreted as an ad to state: “No representation is made about the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers.”