1. Beware the $740-a-year ‘stealth’ taxWhile the fiscal deal makes permanent the Bush-era tax cuts, thus averting the biggest tax increases that would have gone into effect in 2013, it didn’t extend the second biggest one.
Congress quietly let the temporary Social Security payroll tax cut expire. That means that the 2-percentage-point cut in the payroll tax that wage earners have enjoyed over the past two years ratchets back to its normal 6.2 per cent level.
That represents an extra $115 billion of revenue a year for the federal government, according to the Tax Policy centre, or about 22 per cent of the total tax rise had all the “fiscal cliff” tax provisions taken effect.
The increase in the payroll tax would raise the tax bill for the lowest 20 per cent of income earners by 1.1 percentage points, 1.3 percentage points for middle 20 per cent, and 0.8 per cent for the top 20 per cent (who earn more from capital returns than from wages), the Tax Policy centre estimates.
The impact on the average taxpayer: an extra $740 a year.
2. Highest wage earners will pay more income tax
The one group that didn’t escape an increase in income tax rates were the 0.7 per cent of Americans who earn more than $400,000 a year as single taxpayers (or more than $450,000 as joint filers). For them, marginal income tax rates will rise substantially – from 35 per cent to 39.6 per cent.
Three-quarters of taxpayers who make between $500,000 and $1 million would pay an average $10,000 extra in 2013, according to the Tax Policy centre. Some 98 per cent of those earning $1 million or more would owe $125,000 more, on average.
The bill also restores caps on itemized deductions and phases out the personal exemption for those individuals making more than $250,000 ($300,000 for couples).
3. Estate taxes go up
The tax rate on estate taxes will rise to 40 per cent, up from 35 per cent in 2012. The first $5 million of an individual’s estate will be exempted ($10 million for family estates), the same as in 2012.
The deal averts the “fiscal cliff” provisions, which will have lowered the exemption to $1 million and increased the tax rate to 55 per cent. And the exemption levels would be indexed to inflation, so gradually even bigger estates would avoid the tax.
4. Taxes rise on stock returns for the wealthy
The tax rate on dividends and capital gains above $400,000 ($450,000 for families) would rise from 15 per cent to 20 per cent. This would hit the wealthiest Americans, who tend to earn more from their capital investments than from wages and salaries – and raise only a few billion dollars in tax revenue in 2013.
When analysing a similar provision for a broader set of Americans – those with dividends and capital gains above $200,000 ($250,000) – the Tax Policy centre estimated it would bring in only $8 billion.
That’s not all: Courtesy of the 2010 health-care law, high-income taxpayers will be charged a new 3.8 per cent tax on their investment income.
5. The alternative minimum tax drama ends
Every year, some 30 million middle- and upper-middle income earners waited to find out if Congress would extend the alternative minimum tax (AMT) patch, which would keep their tax rates from rising rapidly. Congress always did, but often at the last minute and sometimes even retroactively. The new deal ends that annual drama by adjusting annually the AMT thresholds for inflation.
6. Child, earned income, college tuition tax credits extended
President Obama‘s 2009 stimulus package helped low-income families by boosting the child credit and the earned income tax credit. Tuition tax credits were also expanded. Those provisions, which were due to expire in 2013, have been extended for another five years.
7. Extended unemployment insurance benefits preserved
The fiscal deal continues the extended unemployment insurance benefits for the long-term unemployed for an additional year. In some hard-hit states, that coverage provided aid for up to 99 weeks. That coverage was due to expire Jan. 1 and would have caused jobless aid to expire after 26 weeks of state unemployment benefits.
By one estimate, the new deal from Congress will keep some 2 million jobless from being cut off immediately and another 1 million from losing the aid early this year.
8. 401(k) conversions to Roth IRAs made easier
By easing the rules regarding conversions of 401(k), 403(b), and similar retirement plans, Congress hopes to encourage taxpayers to roll over their taxable retirement funds into nontaxable Roth IRAs. Under current law, taxpayers can only roll their 401(k) plans into Roth IRAs for specific reasons, such as a job change, retirement, or reaching 59-1/2. The new deal eases those restrictions, with the hope that more taxpayers would make the move.
Since rolling a 401(k) into a Roth is a taxable event, the looser rules are expected to generate immediate federal revenue. Congress wants to offset some of the $24 billion lost because of a two-month delay in the big federal spending cuts across the board that the “fiscal cliff” would have enforced beginning Jan. 1.
But it’s a short-term revenue boost at the expense of long-term tax revenues that would come from 401(k) funds, which accumulate tax-free but are taxable once they’re withdrawn from the account.
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