Fallout of the “Fiscal Cliff” – round 1

by Cate Moore on March 11, 2013

Below is some general tax information I received from an accountant listing the impacts of the deal struck between Congress and the President in the “Fiscal Cliff” stand-off, as well as the impacts of California’s Prop 30 tax changes.

In the wee hours of New Year’s morning, the Senate passed the American Taxpayer Relief Act of 2012. (HR 8) By early evening, the House had signed off on it. It was signed into law by the
President on January 2, 2013.
The bill contains about 80 pages of tax law including extenders, many of which were needed in
order to complete 2012 returns.
Among the highlights:
* The lower Bush-era income tax rates are made permanent for 2013 and beyond, except for
high earners, whose top rate increases from 35% to 39.6%;
* The AMT exemption amount is made permanent and indexed for inflation;
* Capital gains and qualified dividend rates remain at 15% for most taxpayers, but they will
increase to 20% for high earners;
* 50% bonus depreciation and $500,000 IRC §179 are extended through 2013; and
* The 2% payroll tax holiday is not extended.


Top tax rate increased
Beginning in 2013, the top tax rate of 39.6% (up from 35%) will be imposed on individuals with
taxable income of more than $400,000 a year, $425,000 for head of household, and $450,000 for
married filing joint. (Act §101(b)) These thresholds are indexed for inflation.
Aside from the top rates, other rates remain the same as 2012.
Capital gains rate increased and qualified dividends made permanent
Beginning in 2013, the maximum capital gains tax will rise from 15% to 20% for individuals
taxed at the 39.6% rate (taxable incomes above $400,000, $425,000, or $450,000, depending on filing
status as noted above). (Act §102(b))
The treatment of qualified dividends taxed at capital gains rates is made permanent. (Act §201(a))
California does not have a reduced capital gain rate for capital gains or dividends.
Payroll tax holiday not extended
The 2% cut in the Social Security tax for all earners will not be extended into 2013. For wages
paid on or after January 1, 2013, the Social Security tax will return to 6.2% (along with the Medicare
tax, the total employee share of the tax will be 7.65%).
Itemized deduction and exemption phaseouts return
Beginning in 2013, phaseouts of itemized deductions and exemptions return for higher income
Itemized deduction and exemption phaseouts
  Filing status                                          AGI level
Single                                                       $250,000
Head of household                                 $275,000
Married filing joint                                  $300,000
Married filing separate                           $150,000
AMT exemption “patch” 
 The AMT exemption amount is made permanent and adjusted for inflation beginning in the
2012 tax year.
AMT exemption amount
Filing status                                         Exemption
Married filing separate                                        $39,375
Single; head of household                                  $50,600
Married filing joint                                               $78,750

Individual provisions that expired after 2011 
The Act retroactively extends for 2012 and through 2013 the following provisions that expired at
the end of 2011:
 * The $250 maximum deduction for educator expenses
* Exclusion from gross income of discharge of qualified principal residence indebtedness.
                           California has its own law that also expired December 31, 2012.
                           The Legislature must extend California’s law
* The enhanced exclusion from income for employer-provided mass transit and parking
benefits.  California has its own exclusions
* Mortgage insurance premiums treated as qualified residence interest
* Deduction of state and local general sales taxes
* Special rule for contributions of capital gain real property made for conservation purposes ; and
* Above-the-line deduction for qualified tuition and related expenses.
Except as noted, California does not conform to any of these provisions.
IRA-to-charity exclusion extended 
The IRA-to-charity exclusion, which expired after 2011, has been revived for 2012 and continued
through 2013. (Act §208; IRC §408(d))
Because of its late passage, the Act provides two special rules:
* A taxpayer may make a charitable distribution in January 2013 and it is deemed to have been
made in 2012; and
* Any portion of a distribution from an IRA to the taxpayer in December 2012 may be treated
as a qualified charitable distribution to the extent that the distribution is transferred to a
qualifying charity before February 1, 2013.
California automatically conforms to this provision
Individual credits expired at the end of 2012 
The Act extends for five years (through 2017):
* The American Opportunity Tax Credit for qualified tuition and other expenses of higher
* The reduced earnings threshold for the refundability of the child tax credit
* Enhanced provisions of the earned income tax credit

Ividual provisions that expired after 2011
California Proposition 30Retroactive tax increase passes (11-07-12)

Proposition 30 retroactively increases income taxes effective January 1, 2012. The following rate increases are effective for seven years:

Governor’s Ballot Initiative
10.3% (1% increase) on income of: $250,001-$300,000 for single/MFS;
$340,001-$408,000 for HOH; and
$500,001-$600,000 for MFJ.
11.3% (2% increase) on income of: $300,001-$500,000 for single/MFS;
$408,001-$680,000 for HOH; and
$600,001-$1,000,000 for MFJ.
12.3% (3% increase) on income of: More than $500,000 for single/MFS;
More than $680,000 for HOH; and
More than $1,000,000 for MFJ.

(Note: Income in excess of $1 million is also subject to the 1% mental health surcharge.)

Proposition 30 also increases the state sales tax rate by 0.25% for four years, beginning January 1, 2013, bringing the standard statewide rate to 7.50% (currently 7.25%).

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