Michael Choate Associates CPA

Fiscal Cliff Tax Agreement

Effective Date:  January 2, 2013

• Payroll tax increase affecting all taxpayers as employee contributions to Social Security rise from 4.2% to 6.2% of gross wages or self-employment income up to $113,700.

• Income tax rates for individuals earning above $400K and married couples earning more than $450K will see a tax rate increase from 35% to 39.6%.

• Capital gains and dividends will rise to 20% from the current 15% for the same income thresholds ($400K individual, $450K married couples).

• The deal reduces itemized deductions for individuals making over $250K and couples making over $300K, also phases out personal exemptions on this income level.

• The Research and Development tax credit is extended through 2013 50% bonus depreciation was also extended through 2013.

• The American Opportunity Tax Credit- allows the credit to be claimed for 4 years, rather than 2. Alternative Minimum Tax: A new permanent inflation patch was included.

• Estate Tax: Estate exemption value set at $5.12 million per person and indexed for inflation. Top estate tax rate increased to 40%.

Obama  Health Care Tax Increase for 2013:

• A new 3.8% tax will be imposed on investment income for individuals making more than $200K and couples making more than $250K (Interest, dividends, rents and capital gains).

• A new .9% payroll tax will be imposed on earned income more than $200,000 for individuals and $250,000 for couples.

• Medical expenses claimed as itemized deductions must now be greater than 10% of adjusted gross income instead of 7.5%.

• Flexible spending accounts are limited to $2,500 per year.