The Fiscal Cliff Bungee Jump

By now, of course, you've heard that Congress has passed legislation avoiding the tax increases of the Fiscal Cliff. Here are the highlights:

The Bush tax cuts are restored for income up to $400,000 ($450,000 for joint filers).  Rates for income above those ceilings rises to 39.6% for ordinary income.

Capital gains rate…or gains you earn from the sale of property that you’ve held for longer than a year increased to 20%. The key point here is that you don’t pay tax until you actually sell the property.

Next, are “qualified corporate dividends.”  The rate also is 20%

Corporate dividends are also subject to the new “Unearned Income Medicare Contribution” that goes into effect on January 1.

New rates on capital gains and qualified corporate dividends will make tax planning an even more important part of your overall financial planning.

Back in 2010, Washington cut the payroll tax by 2%, for one year, on the employee side. This meant a savings of up to $2,136 for someone earning at or above the Social Security wage base.

Earlier this year, Washington struggled to extend it through 2012. But as it stands now, that cut expires. And unfortunately, it looks like both sides are content to let that cut expire for good.

The Alternative Minimum Tax, or AMT, is a parallel tax designed to prevent “the rich” from using regular deductions to avoid tax entirely.

The Alternative Minimum Tax is finally indexed for inflation, meaning Washington won't need to "patch" it every year so about 33 million tax payers are safe.

Next, the estate tax…

The estate tax "unified credit" amount that you can bequeath tax-free remains at $5 million, indexed for inflation.  The actual rate rises from 35% to 40%.

The legislation also extends several popular tax breaks, like higher limits for business equipment expensing, deductions for student loan interest, and tax-free charitable gifts made directly from Individual Retirement Accounts.

We realize you've already heard this news.  But we want you to know we'll be studying the new law in the coming weeks and months to look for every opportunity to help you save.  And of course, if you have any questions, don't hesitate to call us.

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