A Brief Explanation of the Tax Deal

A Brief Explanation of the Tax Deal

By: Amanda Wilson

Anyone who has read or watched the news in the last few weeks knows that federal taxes were set to increase automatically on January 1, and that Congress and the President reached a last minute deal that was touted as keeping us from going over this fiscal cliff.  The question is – what did the tax deal do?

The tax deal did prevent tax rates from increasing on ordinary income, dividends and capital gains for most taxpayers (generally, those taxpayers who made less than $450,000 (married) or $400,000 (single)).  However, Congress and the President allowed several other tax increases to go into effect.  These increases include a 2 percent increase in employee payroll taxes, a 3.8 percent tax on net investment income for taxpayers that make more than $250,000 (married) or $200,000 (single); and a 0.9 percent increase in the Medicare tax rate for taxpayers with wages higher than $250,000 (married) or $200,000 (single).  In addition, the tax deal made permanent the $5 million (adjusted for inflation) exemption available in the estate, gift and generation –skipping transfer area, which was otherwise set to return to $1 million.  The deal also raised the maximum tax rate in this area from 35 percent to 40 percent, although this is much better than the 55 percent maximum tax rate that was set to go into effect.    In short, the tax deal did prevent many tax rate increases, but it was only a partial fix.  Many taxpayers will be facing increased federal taxes this year.

For a more complete discussion of the recent lax legislation, please visit to http://www.lowndes-law.com/publications-presentations/1360-a-brief-explanation-american-taxpayer-relief-act-of

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