Income taxes. The Act keeps the “Bush” tax rates intact for individuals with taxable income under $400,000 ($450,000 for married taxpayers, $425,000 for heads of household). Income above these levels will be taxed at a 39.6% rate (up from 35%).
AMT patch. The Act permanently increases the exemption amounts of the Alternative Minimum Tax (“AMT”) to $78,750 for married taxpayers filing jointly and $50,600 for single filers. Exemptions will be indexed for inflation.
Capital gains and dividends. The Act raises the top rate for dividends and capital gains from 15% to 20% for taxpayers who would be subject to the new 39.6% bracket. Counting the 3.8% surcharge from the Affordable Care Act, dividends and capital gains will be taxed at a rate of 23.8% for high-income earners. The top capital gains rate will stay at 15% for lower-income taxpayers.
Deduction limitations for high-income individuals. The Act reinstates the Clinton-era “PEP and Pease” limitations on the personal exemptions and itemized deductions for couples with incomes exceeding $300,000 and singles with incomes over $250,000. These two provisions reduce tax benefits for high-income earners by phasing out exemptions and itemized deductions.
Transfer taxes. The Act prevents steep increases in estate, gift and generation-skipping transfer (GST) tax that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation). However, the Act also permanently increases the top estate, gift and GST rates from 35% to 40%.
Individual extenders. The Act extends for one year a host of individual provisions, including the treatment of mortgage insurance premiums as qualified residence interest, deductions for state and local general sales taxes, and the above-the-line deduction for qualified tuition and related expenses.
Business tax extenders. The Act extends for one year many key business tax breaks including depreciation provisions, notably including bonus depreciation, and the research and work opportunity tax credits.
Other items. The Act extends unemployment insurance and many health and energy-related provisions. This also extends President Obama’s expansions on the Child Tax Credit, Earned Income Tax Credit and the American Opportunity Tax Credit for five years.
The Act does not include an extension of the 2011 and 2012 payroll tax cuts for employees on Social Security tax withholding from paychecks, so most workers will see their Social Security taxes rise from 4.2% to 6.2%.