Relief? What Relief? Penalties from American Tax Relief Act of 2012

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Yesterday, we talked about some general tax hits that married couples are getting in 2013. Today, we’re looking specifically at tax penalties and/or disadvantages due to the 2012 Act. Unfortunately, a lot of them specifically impact married couples. I’m not advocating divorce, but…..

Here is a list of the new marriage penalties added by the American Taxpayer Relief Act of 2012.

  1. American Taxpayer Relief Act of 2012 (ATRA)’s New Top Tax Rate. ATRA created a new 39.6% top tax bracket, which starts at $400,000 for single filers and $450,000 for couples filing jointly. Consider two people, each with $400,000 of taxable income. Unmarried, neither would hit the 39.6% rate. Married, they would pay the top rate on $350,000, the total income above $450,000.That and other rate effects would impose a marriage penalty of more than $30,000.
  2. Return of exemption and itemized deduction adjusted gross income phase-outs. ATRA reinstated both the phase-out of personal exemptions (PEP) and the limitation on itemized deductions that the 2001-2010 tax acts had eliminated. PEP takes away 2% of personal exemptions for each $2,500 (or part thereof) above a threshold—$250,000 of adjusted gross income (AGI) for singles and $300,000 for couples (both indexed for inflation going forward). PEP wouldn’t affect an unmarried couple in which each person has $250,000 of AGI but would take away all of their personal exemptions if they were married. That could increase their tax bill by more than $1,500 for each person in the family. The 3% AGI phaseout reduces itemized deductions by 3% of AGI over the same thresholds that apply for PEP. It wouldn’t affect the unmarried couple with each person having $250,000 of AGI, but would raise their taxable income by up to $6,000 if they married, adding as much as $2,376 to the tax bill.
  3. Affordable Care Act Taxes. Two new taxes associated with the 2010 healthcare act take effect in 2013: a 0.9% tax on earnings over unindexed thresholds—$200,000 for singles and $250,000 for couples—and a 3.8% tax on net investment income over those thresholds. Two people earning $200,000 each would not pay either tax. If they marry, they would pay between $1,350 (if their income is all wages) and $5,700 (if it’s all investment income) in new Medicare taxes.

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