On January 2 of this year, the American Taxpayer Relief Act of 2012 (or fiscal cliff deal) became law and was made retroactive to January 1. The act was designed to shield the middle class from the expiration of the Bush-era tax rates. While the law included tax increases directed at wealthier Americans, much of the act was targeted at the middle class. In particular, five key tax laws of the fiscal cliff deal affect the middle class and they are discussed below.
First Provision
The first provision of the tax changes was something omitted in the fiscal cliff deal and that is an extension of the payroll tax cut enacted by the president back in 2011. All taxpayers enjoyed a 2% reduction in their withholding due to the lower Social Security payroll tax rate of 4.2%. However, with the expiration of this tax cut, the rate returns back to 6.2%. Given that the maximum taxable earnings subject to the Social Security payroll tax is $113,700 in 2013, the tax increase affects the middle class more than it does top wage earners. This makes this tax increase a regressive tax increase and will result in a decrease of $100 a month in disposable income for households earning $50,000 a year.
Second Provision
The second provision affecting the middle class was the permanent extension of exemption amounts to the Alternative Minimum Tax (AMT). The exemption amounts for 2013 increased over 2012 levels and are now $50,600 for individuals, $78,750 for married people filing jointly, and $39,375 for people married filing separately. Also, the AMT exemptions are now inflation adjusted annually. This will insure that the AMT, designed to affect the wealthiest Americans, does not become the de facto middle class tax rate. If the AMT exemptions had not been increased, sixty million workers would have become subject to higher tax rates.
Third Provision
The third provision affecting the middle class is the permanent extension of the Bush-era tax rates of 10%, 25%, 28%, 33% and 35%. A new tax rate was added of 39.6% for income over $400,000 for individuals and $450,000 for couples. Absent this change, tax rates would have increased across the board for every worker and coupled with the expiration of the payroll tax cut would have been a substantial tax increase.
Fourth Provision
The fourth provision affecting the middle class is the permanent extension of the marriage penalty tax relief. For couples filing jointly, the standard deduction is exactly twice that of an individual’s standard deduction. This eliminates the disparity in the standard deduction for married people which disparity became known by the pejorative “marriage penalty tax”. The fiscal cliff deal prevented the standard deduction for married couples from decreasing to $10,150 from $12,120.
Fifth Provision
The fifth provision benefiting the middle class is the permanent extension of the Bush-era child tax credits of $1,000 per dependent child who is under age 17 by year’s end. The phase out for this tax credit remains the same at $75,000 for individual tax filers, $110,000 for married filing joint or $55,000 for married filing separate.
There are many other provisions in the American Taxpayer Relief Act of 2012 which directly or indirectly affect middle class taxpayers such as business tax extenders, small business expensing, and bonus depreciation. Also, tax credits for education were also extended. However, the provisions cited above were those which most directly affected the middle class. Covering all the tax provisions is beyond the scope of this article but they may be reviewed in greater detail by clicking on the link for The American Taxpayer Relief Act of 2012.
This article was written by Robert Tritter, an avid writer of law-related articles throughout the web. He writes this on behalf of R&G Brenner, your number one choice when looking for a Brooklyn Tax Consulting firm. Check out their website for more information on their services.