Amid great fanfare, the House of Representatives passed the Senate deal negotiated by Vice President Joe Biden and Senate Minority Leader Mitch McConnell late in the evening on New Year’s Day, thereby averting major tax hikes for most U.S. households. Here are eight things to know about the deal and how it will affect your pocketbook.
- Your taxes are going up. Although the approved deal raises tax rates only on individuals with income over $400,000 and families with income over $450,000 (their top tax rates will increase to 39.6%, up from 35% in 2012), the deal did not save the Payroll Tax Holiday. Therefore, the payroll tax immediately rises back to its 2010 level resulting in a rate that increases from 4.2% in 2012 to a new rate of 6.2%. The Tax Policy Center reports that the “average federal effective tax rate will be 21.7 percent and the average increase is $1,257.”
- Millions of taxpayers will be spared from the Alternative Minimum Tax. Time Magazine reports, “According to one GOP estimate, 28 million families would have had to pay an average of $3,400 in extra taxes this year without the AMT fix. About four million taxpayers owed the AMT in 2011, up from about 1.3 million in 2001, according to the Tax Policy Center.”
- Phase-out of personal and dependent exemption deductions for married taxpayers with an AGI of $300,000 or more and single taxpayers with an AGI of $250,000.
- Phase-out of itemized deductions if your AGI exceeds $250,000 for single taxpayers and $300,000 for married joint-filing taxpayers.
- The American Opportunity Tax Credit, the Child Tax Credit and the Earned Income Tax Credit all survived and will be on the books for the next five years.
- Section 179 has been increased retroactively for 2012 and 2013. With the new deal in place, Section 179 has been increased retroactively for 2012 from $139,000 back to $500,000. The new law extends the $500,000 limit through 2013, and pushes the $25,000 cap to 2014. Section 179 is available only to companies with total capital expenditures for the year under a certain threshold — $2 million through 2013 and $200,000 starting in 2014.
- 50 percent bonus depreciation for capital expenditures has been extended through 2013.
- The Research and Development Tax Credit has been renewed retroactively for 2012 and “prospectively for 2013.”