It could have been much worse for top earners.
The budget deal passed by Congress Jan. 1 and signed into law by President Barack Obama the following day raises taxes on the income and investments of fewer high earners than Democrats proposed. The accord makes permanent the estate-and-gift tax exemptions that wealthy Americans raced to take advantage of when their fate was uncertain.
Also, Congress didn’t go as far as the president proposed in restricting top earners’ use of tax breaks such as mortgage interest and charitable deductions.
“The increases in taxes and limits to deductions are more favorable than expected,” said Christopher Zander, partner and head of wealth planning at Evercore Partners Inc.’s wealth management unit. “They could have been worse for high net-worth taxpayers.”
Still, families earning $250,000 to $450,000 a year, who are now breathing a sigh of relief, might have more of a tax pinch in 2013 than they anticipate. And those earning more than $450,000 a year may be better off than they expect.
The deal struck by Congress Jan. 1 averts most of the $600 billion in tax increases and spending cuts that were set to take effect this month. It includes a new top income tax bracket with a 39.6 percent rate, which applies to annual taxable income above $400,000 for individuals and $450,000 for married couples. Obama had campaigned since 2007 to set the levels at $200,000 and $250,000, instead.
Democrats had proposed the lower thresholds as a marker for higher rates on capital gains and dividends. Instead, the law raises the rate to 20 percent from 15 percent, also for taxable income above $400,000 for individuals and $450,000 for couples. That means four tax brackets effectively exist for long-term capital gains and dividends this year: the existing zero and 15 percent, 18.8 percent and a top 23.8 percent.
Investors will face two new taxes in 2013 including a 3.8 percent investment surtax that started Jan. 1 for individuals with adjusted gross income of more than $200,000, or $250,000 for married couples, to help finance the 2010 law that expands health-care coverage.
“There were hopes that there would be more simplicity to the tax code,” Zander of Evercore Wealth Management said. “It has now become even more complex.”