The Fiscal Cliff Deal: Things You Should Know

A recent article in Forbes discusses ten facts about the fiscal cliff deal that all Americans should be aware of.  The Bush tax cuts were made permanent for most taxpayers.

As to the federal estate tax, the exemption will remain at $5.12 million per person and indexed for inflation, with a tax rate increased from 35% to 40%.

One interesting fact is that, for one day, everyone’s taxes went up. This happened because the former tax cuts expired on December 31, 2012. Although the deal includes provisions that will apply the tax cuts retroactively, everyone technically had higher taxes on January 1, 2013.

Importantly, republicans and democrats were finally able to agree on how much a person or couple should bring in before they are considered a “high income earner.” This definition is particularly important because high income earners will see an increase in their taxes. Under the deal, high income earners are individuals who take in $400,000 per year, and married couples who take in $450,000 per year.

Those considered high income earners should be aware that their marginal income tax rates are set to reach 39.6 % this year. For the remainder of taxpayers, their previous tax rates were extended. Moreover, the respective tax brackets for these taxpayers was permanently indexed for inflation.

Other important changes are:

  • Dividends and capital gains will be taxed at a rate of 20 % for those individuals earning more than $400,000 or couples with an annual earnings of more than $450,000. It will remain the same for couples and individuals below the thresholds.
  • There will be an additional 3.8% Medicare Surtax from the Affordable Care Act on dividends and capital gains for individuals earning over $200,00 and couples earning over $250,000.
  • The Alternative Minimum tax exemption is permanently indexed to inflation.
  • Unemployment insurance benefits will be extended for one year.
  • Many tax credits will be extended including those for green energy and 50 percent depreciation on business purchases.
  • Medicare reimbursements for doctors were restored.
  • The targeted spending cuts (sequester) will be delayed for two months to allow new Congress to tackle the tough issue of controlling expenses.

I think I’m going to enjoy a glass of milk to digest these changes since the “Milk Cliff” was averted.