The “American Taxpayer Relief Act” that was approved by Congress on January 1, 2013 keeps many favorable tax breaks in place. It will, however, increase taxes for high-income individuals.

Federal Income Tax:

The current income tax rates for individuals will stay in place for most Americans, leaving taxpayers making more than $400,000 for single filers and $450,000 for joint filers to carry most of the burden. They will see their maximum tax rates increase from 35% to 39.6%.

Personal Exemption Phaseout (PEP):

This provision reduces or eliminates the benefit of personal exemptions for both taxpayers and their dependents by 2% for each $2,500 that their adjusted gross income (AGI) exceeds the threshold for the relevant filing status. The starting threshold will be for those making $250,000 for single filers and $300,000 for joint filers.

Itemized Deductions:

This provision reduces the amount of allowable itemized deductions for higher-income taxpayers. Those making $250,000 for single filers and $300,000 for joint filers, will see their itemized deductions reduced by 3% of the their adjusted gross income in excess of the threshold amount. The reduction cannot exceed 80% of otherwise allowable itemized deductions.

Capital Gains and Dividend Tax Rates:

The top rate for capital gains and dividends will permanently rise from 15% to 20% for taxpayers $400,000 for single filers and $450,000 for married taxpayers. When adding the 3.8% surtax effective January 1, 2013, due to the Health care act, the overall rate for high-income taxpayers will be 23.8%. The base 15% rate will continue to apply to taxpayers in the 25%, 28%, 33% and 35% income tax brackets.

Estate & Gift Taxes:

The new law extends the $5 million (adjusted by inflation) lifetime exclusion for estate & gift tax purposes.
The maximum tax rate for both was increased from 35% to 40%.

Social Security Tax:

Americans at all income levels will see a 2% jump in their employee portion of the Social Security tax. It will return to the 6.2% level in 2013 after the stimulus rate of 4.2% expired on 12.31.2012.


The law also permanently increased the Alternative Minimum Tax exemption to allow many taxpayers to avoid becoming subject to that tax. Provisions that were extended for 2012 that had previously expired were the sales tax deduction and many individual tax credits.

Click here to read CCH’s Tax Briefing entitled, “Fiscal Cliff Tax Legislation”.

For more information on how this act will affect you, please feel free to contact us at 713.667.9147.