With Congress’ passage of the American Tax Relief ACT of 2012 on New Year’s Day, the train’s brakes screeched to a half just a few feet from the fiscal cliff.
Here’s what you need to know about how the new tax law changes may affect your tax return and wallet.
The Alternative Minimum Tax (AMT)
In 1969 when the Alternative Minimum Tax was first implemented, it guaranteed that millionaires and high-income individuals who paid little to no income tax would have to pay a minimum amount of taxes. Over the years the number of individuals who fall under this category has grown, along with the total revenue.
Some of the most common reasons people pay for the AMT are those who:
- have several children
- take interest deductions from second mortgages
- have capital gains
- have high state and local taxes
- incentive tax options
Throughout the years, different measures have been taken, such as The Tax Reform Act of 1986 which eliminated the partial exclusion of capital gains, reducing overall revenue at the time, but helping individual taxpayers.
Under the American Tax Relief Act of 2012, the Alternative Minimum Tax (AMT) was permanently patched, which means 34 million middle-income families can celebrate the New Year with an average of $3,700 back in their pockets. Under current law, the AMT typically hits taxpayers who have a household income of over $75,000 and are married with more than two kids.
The Tax Extenders
The “Tax Extenders” refer to a broad set of temporary tax laws. Here are just a few of the tax deductions and credits that were included in this “Tax Extenders” package under the American Tax Relief Act:
- The Educator Expense Deduction– If you are a teacher, you can claim up to $250 of classroom expenses for supplies, materials, books and software.
- Tuition and Fees Deduction – College students or parents can once again deduct education expenses related to schooling, including tuition, books and other supplies, up to $4,000.
- Mortgage Debt Relief – Previously, taxpayers who have mortgage debt canceled or forgiven after 2012 may be required to pay taxes on that amount. Under the new law, up to $2 million of forgiven debt is eligible to be excluded from income in 2013.
- Energy Tax Breaks – Homeowners who made energy efficient improvements to their homes in 2012 will still be able to claim the Residential Energy Property Credit. This credit could mean as much as $500.
Reduction in Individual Income Tax Rates
As a result of the permanently extended Bush Tax Cuts, 98 percent of Americans will continue to see lower tax rates. Congress extended the existing tax rates to all but the highest earners. For the wealthiest taxpayers, there’s a new top tax rate of 39.6 percent compared to 35 percent for 2012.
The income threshold for the top tax rate is $450,000 for joint filers and $400,000 for single filers. These same filers will also see the rate on long term capital gains and dividends jump to 20% from 15%.
Payroll Tax Rate
In 2010, Congress cut the payroll tax rate by 2 points to 4.2% in order to put more money into everyone’s paycheck. This tax relief expired on December 31, 2012 and was not extended.
This means wage earners will see a smaller paycheck starting almost immediately. To calculate how much less you will be receiving, you can multiply your gross pay by two percent. So if your gross pay is $1000 every week, you’ll find $20 less in your paycheck each week. The payroll tax is applied against annual wages up to $113,700.
Tax Relief for Families and Children
The American Tax Relief Act of 2012 also includes credits for families and children. These credits are:
- Child Tax Credit: You will continue to be able to qualify for a $1,000 tax credit for each dependent child you are able to claim under the age of 17.
- Earned Income Tax Credit (EITC): If you have three children and are married you can still receive a maximum tax credit worth over $5,700.
- Dependent Care Credit: Increased dependent care credits remain in place that allow you to claim up to $2,100 of your eligible dependent care cost for two or more children.