Fiscal Cliff Avoided, but Higher Taxes Loom Ahead in 2013

The much-publicized “fiscal cliff” that was looming over the new year involved both the expiration of the Bush-era tax cuts for most taxpayers and mandatory spending reductions that would have resulted in draconian cuts across the federal budget. The country avoided going over the fiscal cliff, at least on a temporary basis, by a deal between U.S. Congress and the president that made permanent most of the Bush-era tax cuts except those applicable to high-income individuals and by deferring the consideration of expense reductions for several months. The tax provisions of this agreement are contained in the American Taxpayer Relief Act of 2012, which was signed by President Obama on January 2.

Under the act, for tax years beginning after 2012, the income tax rates for most individuals will remain at 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent, as originally enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). However, the act provides that the highest marginal income tax rate for individuals will revert to the pre-EGTRRA rate of 39.6 percent for those individuals with taxable income in excess of $400,000 per year ($450,000 for married couples filing jointly). These thresholds will be indexed for inflation after 2013. The maximum tax rate for qualified dividends and long-term capital gains will increase from 15 percent to 20 percent but only for individuals in the new highest tax bracket. The tax rates of 28 percent and 25 percent on gains arising from the sale of collectibles and from the recapture of straight-line depreciation continue unchanged after 2012.