We sidestepped a fall off the so-called fiscal cliff, but that doesn’t mean we’re home free. The new legislation, passed 257-167 in the House late Tuesday, raises taxes on the wealthiest 2 percent of Americans. But taxpayers at all income levels will feel it.
Whether you’re unemployed, making less than $50,000 or more than $500,000, the bill will have an impact on your bottom line. For better or worse, here’s how:
For the past two years, employee contributions to Social Security have been 4.2 percent, down from the traditional 6.2 percent. That’s over. Starting January 1, Social Security withholdings are back at 6.2 percent on earnings up to $113,700.
As a result, you’ll see more withheld from your paycheck. If you earn $50,000 annually, that adds up to a $1,000 tax hike this year. If you earn the max of $113,700 or more, the expiration will cost you $2,274 – close to $200 monthly.
The bill raises income tax rates for the first time in nearly two decades. Individuals making more than $400,000 a year and couples making more than $450,000 will now be facing rates of 39.5 percent, up from 35 percent. For this same group, taxes on capital gains and dividends will rise to 20 percent, up from 15 percent. In addition, personal exemptions and itemized deductions will be phased out starting at incomes of $250,000 for singles and $300,000 for joint filers.
For those making less than those amounts, tax cuts that were set only temporarily in the Bush era are now permanent.
Alternative minimum tax
AMT – a 26 percent or 28 percent rate applied to certain types of income – is now indexed to inflation. This move kept 31 million middle-class taxpayers from being hit.
Estates will be taxed at a top rate of 40 percent, up from 35 percent. The first $5 million in value will be exempted for individual estates and $10 million for family estates.
Good news for the unemployed: Jobless benefits for the long-term unemployed will be extended. Without this bill, benefits would have ended after 26 weeks.
A variety of tax credits that benefit low and middle-class taxpayers have been extended for five more years. They include:
- The Child Tax Credit – up to $1,000 for each qualifying child under the age of 17 at the end of 2012. This phases out for married couples earning over $110,000 and single filers earning more than $75,000.
- The Child and Dependent Care Credit – 20 to 35 percent of your child care expenses up to $6,000, with the size of your credit depending on your income. Next year, this credit will be significantly reduced.
- The Earned Income Tax Credit – a credit for married couples who earned less than $50,270 in 2012, and singles who earned less than $45,060. The maximum credit is $5,891 this year, with taxpayers with more children getting the most.
- The American Opportunity Tax Credit – an annual credit of $2,500 per student is available to individuals with a modified adjusted gross income of $80,000 or less, or $160,000 or less for married couples filing jointly.
Business tax credits
For one year, the accelerated “bonus” depreciation of business investments in new property and equipment, a tax credit for research and development costs, and a tax credit for renewable energy have been extended.
Medicare payments to doctors
A 27-percent cut in Medicare payments to doctors has been blocked for one year.
About $109 billion worth of across-the-board spending cuts impacting the Pentagon and other forms of government spending have been delayed for two months.