Will the American Taxpayer Relief Act Impact You?

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As millions of Americans celebrated the dawn of 2013, the House of Representatives adjoined to vote on the Senate’s recently amended “American Taxpayer Relief Act of 2012,” a solution to the nation’s impending “fiscal cliff.”

With a final tally of 257 votes in favor of the Act, the House agreed to approve the amendment on January 1st, which President Obama promptly signed into law the following day.

But will the Act actually impact you? And, if so, how?

“Under this law, more than 98 percent of Americans and 97 percent of small businesses will not see their income taxes go up,” noted President Obama. “Companies will continue to receive tax credits for the research they do, the investments they make, and the clean energy jobs they create.”

The unemployed took a sigh of relief as Congress extended unemployment benefits to as long as 99 weeks. While benefits have been cut back on as unemployment has eased, this will help millions from losing their benefits.

As a result of the Act, income taxes will begin to rise for the nation’s highest earners – on a permanent basis. All American couples who annually earn more than $450,000 will be required to pay 39.6 percent for every dollar they receive above that amount, according to the Act. If an individual earns $400,000 per year, or more, they must also pay 39.6 percent for every dollar above that amount. Prior to the Act, such income earners paid 35 percent for every dollar.

Furthermore, such earners’ capital gains and dividend tax rates will permanently rise as well, from 15 to 20 percent. Nonetheless, the rate will not fluctuate for individuals earning less than $400,000 per year, or for couples annually earning less than $450,000, according to the Act. Most taxpayers’ capital gains and dividend tax rates will be retained at 15 percent.

In the meantime, a majority of Americans will be impacted by the termination of the two-year-long Social Security payroll tax holiday. From 2011 to 2012, employees were only required to pay a 4.2 percent payroll tax, in comparison to the usual 6.2 percent. However, all employees earning up to $113,700 per year will now have to pay the standard 6.2 percent rate again, according to the U.S. Social Security Administration. Additionally, supplemental federal tax withholding increased 3 percent to 28 percent. This will impact supplemental earnings like bonuses or commissions.

Self-employed individuals’ two-year tax holiday has ended as well, as their Social Security and Medicare tax will also rise by two percent, from 13.3 to 15.3 percent, according to the U.S. Social Security Administration.

On a positive note, American singles who earn $50,600 per year or less will no longer be required to pay the Alternative Minimum Tax (AMT), an income tax enacted by the government. Prior to the passing of the Taxpayer Relief Act, individuals earning $33,750 or more were obligated to pay the AMT. As of January 2nd, the AMT will now be indexed to inflation, so that lower-income Americans can save more.

The AMT’s index to inflation will also apply to married couples; all couples annually earning $78,750 or less will no longer be mandated to pay the AMT, according to the Act. For years, all couples earning $45,000 per year or more were required to pay the tax.

Thousands of U.S. received several tax breaks including $14.3 billion in credits for research and development projects. The Production Tax Credit, a renewable energy incentive, and the Research and Experimentation Tax Credit, which assists employers with R&D expenditures, have been extended to the end of 2013, according to the White House. The energy industry faired well with large scale credits in wind energy.

The Act has also extended credits like the Earned Income Tax Credit, for low-income Americans, and the Work Opportunity Tax Credit, for employers that hire underemployed Americans, such as veterans and youths.

According to the Act, Section 179 of the U.S. Internal Revenue Code will also continue, providing employers with tax breaks if they purchase or lease certain types of used or new capital equipment, including software, for their business operations in 2013.

Finally, companies will still be allowed to write off 50 percent of their capital investments, as national bonus depreciation rules were also extended.

But will such extensions and tax increases advance America’s economic recovery? Will any other extensions be approved this year? And, how will employers – and employees – react to the new regulations?

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