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Despite significant criticism, congressional leaders came together in the end to sign into law new legislation that bodes well for the vast majority of individual taxpayers and small businesses. There was certainly some compromise in the tax bill, but many folks should be happy about the result. How will you benefit or not?

2013-tax-changesOrdinary income and capital gains tax rates
Unless you earn $400,000 as an individual taxpayer or $450,000 as joint filer, the tax brackets will stay exactly the same as in 2012 or 10%/15%/28%/33%/35%. Those with income that exceed those thresholds, will pay 39.6% in taxes. In addition, many taxpayers will continue to only be subject to the 15% capital gains tax rate should earnings be less than $400,000 or $450,000 as a joint filer. If your income exceeds those thresholds, your capital gains tax rate will increase to 20% and you may be subject to the 3.8% new investment income surtax if your adjusted gross income exceeds $200,00 as a single filer and $250,000 as a joint filer.

The Alternative Minimum Tax is finally indexed for inflation
One of the biggest victories for taxpayers relates to the archaic Alternative Minimum Tax. No, the tax was not eliminated, but it will finally be permanently indexed for inflation. There will be no more temporary last minute patches. For 2012, the AMT exemption is increased to $50,600 for single filers and $78,750 for joint filers. There’s still a lot of work to be done with the AMT as middle class families continue to be burdened with the tax, but we’re moving in the right direction.

Many tax breaks will be extended
The American Opportunity Tax Credit for students, the Earned Income Tax Credit, and the Child Tax Credit will all be extended for the next five years.

The estate and gift taxes
The estate and gift tax exemption will remain largely the same at $5.25 million or $10.5 million for joint filers. However, the tax rates will increase from 35% to 40% if the estate or gift exceeds the exemptions, which is likely not the case for most taxpayers.

Business tax breaks are extended and improved
The Section 179 deduction is now increased to $500,000 for 2012 and 2013. The Section 179 deduction will now be capped at $25,000 starting in 2014. The Bonus Depreciation election on new property purchased, which was schedule to drop to zero, has been extended to 50% of the purchase price. Also, the R&D credit that seems to always expire, is now reinstated through 2013. The work opportunity tax credits have also been extended through 2013.

Any bad news?
There was some compromise in the bill. The payroll tax cut expires, which means that taxpayers will now pay 6.2% in social security taxes as opposed to 4.2% in prior years. Personal exemptions will be eliminated for single filers earning $250,000 or more and joint filers earning $300,000 or more. In addition, itemized deductions will also be limited for taxpayers that exceed the aforementioned thresholds.

More tax questions? Browse answers or ask 2013 tax questions online.

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What Does the Fiscal Deal Mean For Your 2012 & 2013 Taxes? was last modified: January 4th, 2013 by The BIDaWIZ Team
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