Impact of the American Taxpayer Relief Act of 2012

Very little relief for some…

A lot of changes to the tax law came into effect this year as a result of the American Taxpayer Relief Act of 2012.  These changes include a higher marginal tax rate bracket, higher qualified dividends rates, long term capital gains rates, and an entirely new tax called the net investment income tax.  Additionally,  personal and dependency exemptions phaseout at higher income levels along with total itemized deduction amounts.   The sum of these mean one thing to many citizens…. HIGHER taxes in 2013!

The first step in understanding how this will impact you personally is to understand the income thresholds and where each apply.  Unfortunately, they are not all aligned.  If you are single, the magic number is $400,000 in taxable income to be impacted by the higher ordinary income tax bracket (39.6%), qualified dividend rate (20%), and long-term capital gains tax (20%).  The itemized deduction and personal exemptions phase out when adjustable gross income (AGI) reaches $250,000.  If you are married filing a joint return the thresholds are $450,000 and $300,000 respectively.

The itemized medical expense deduction is raised to only those costs above 10% of AGI except for those who are 65 or older.  In this case, the floor remains at 7.5% until December 31, 2016. 

Lastly, there is a new Net Investment Income Tax of 3.8% that is based on two different factors.  The additional tax is based on the lesser of the net investment income – or – the amount of gross income in excess of $200,000 for singles or $250,000 for married filing joint returns. 

If you are slightly confused you are not alone! 

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