The American Taxpayer Relief Act...What does it all mean?

The 'fiscal cliff' has been a source of debate for both Democrats and Republicans, leaving many Americans with questions about motives, means, and a clear understanding of what it all means. Now passed, the American Taxpayer Relief Act of 2012 provides legislation extending 2001 and 2003 tax provisions, and creates additional tax reform.

So what does it all mean? And most importantly, what does this mean to YOU?

Here are some highlights:

Tax Policy

Marginal Income Tax Rates: permanent extension of current policy up to $400,000 for singles, $450,000 for married couples: Permanently extends tax cuts made in 2001 by Republican President George W. Bush for income below $400,000 per individual, or $450,000 per family. Income above that level would be taxed at 39.6 percent, up from the current top rate of 35 percent. Above that income threshold, capital gains and dividend tax rates would return to 20 percent from 15 percent.

Capital Gains & Dividends: Permanent: 15% top capital gains and dividends rate up to $400k (singles), $450k (married); 20% rate for both above threshold. Caps personal exemptions and itemized deductions for income above $250,000, or $300,000 per household.

Estate Tax: Permanent extension of current policy on portability and unification with a $5M exemption indexed for inflation and a 40% top rate: The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax "portability" election, under which, if an election is made, the surviving spouse's exemption amount is increased by the deceased spouse's unused exemption amount, was made permanent by the act. The generation skipping tax exemption follows the estate tax scheme.

Gift Tax: The annual exclusion for gifts rises to $14,000 for 2013, up from $13,000 for 2012.

Temporary Payroll Tax Cut:Allowed to expire. This means less money to take home in workers' pay checks.

Tax Credits: Extends child tax credit, earned income tax credit, and tuition tax credit for five years.

Spending Policy

Debt Limit: No increase in the debt limit — remains at $16.394 trillion.

Sequester: sequester is turned off for two months and paid for with a reduction in discretionary spending cap for 2013 and 2014, and expanding eligibility for Roth conversion. Postpones for two months the start of $1.2 trillion in automatic spending cuts over 10 years, known as the "sequester." For those two months, $24 billion in savings would be substituted. Half of those savings would be split between defense and non-defense programs. The other half includes new revenues

Unemployment Insurance: Extends unemployment insurance benefits for one year for 2 million people.

Pay Raises: Cancels a cost-of-living raise for members of Congress.

For additional information on how the American Taxpayer Relief Act of 2012 will affect your family, call us at (714) 573-7149 or email: to schedule your FREE initial consultation about your estate plan, business plan, or family law matter today.

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