Investors looking for clarity out of Washington got half of what they wanted. As America was falling off the fiscal cliff, Congress agreed to new tax legislation. It also agreed to take an additional two months to decide what spending cuts should be made. Evidently, the threat of sequestration (automatic cuts) was not enough to prevent Congress from doing what it does best: postpone tough decisions on spending.
It’s a mixed bag. The new tax legislation enshrines much of the Bush-era tax cuts. The American Taxpayer Relief Act of 2012 keeps tax rates on earnings, capital gains and dividends unchanged for most Americans. Affluent couples earning more than $450,000 and single filers earning more than $400,000 will pay a higher 39.6% income tax rate and a 20% tax rate on long-term capital gains and dividends. The alternative minimum tax is permanently patched.
There are other aspects of the law that have not been as widely publicized as the aforementioned rates. Those of you who are age 70 1/2 or older can make charitable tax-free IRA distributions of up to $100,000 through the end of 2013. If you have not made a 2012 tax-year charitable distribution from your IRA yet, you can distribute up to $100,000 by January 31, 2013, for 2012 and up to $100,000 by December 31, 2013, for 2013. Sales taxes can be deducted in lieu of state income taxes through 2013. The new 3.8% and 0.9% taxes that go into effect this year as part of the health care reform act still stand.