American Taxpayer Relief Act

From the Desk of Samuel Handwerger, CPA

The American Taxpayer Relief Act, and a New Marriage Penalty

On a more or less daily basis I will explore some facet of the recent tax bill passed by Congress that averted the so-called “cliff”; at least the tax cliff that started in 2001.

The most crucial element of the law regarded the individual income tax rates. Here Congress rretained the rate brackets  at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6% as would have occurred under the EGTRRA sunset).

The 39.6% rate does apply to income above a certain threshold (specifically, income in excess of the “applicable threshold” over the dollar amount at which the 35% bracket begins). The applicable threshold is $450,000 for joint filers and surviving spouses, $425,000 for heads of household, $400,000 for single filers and $225,000 (one-half of the otherwise applicable amounts for joint filers) for married taxpayers filing separately. These dollar amounts are inflation-adjusted for tax years after 2013.

COMMENT: There is a MAJOR marriage penalty here. Two single people living together would get two $400,000 exemptions (one each). A married couple gets hit when combined income exceeds $450,000. Perhaps some of those same-sex couples that are married under state law will not be happy now if the Supreme Court rules that they should be subject to the same tax rules as other married persons. That ruling is expected some time in June of this year. We have been helping same-sex couples for years with their tax and financial planning. Given this new, perhaps unintended consequence of the new law, this type of planning may be more complicated should the Defense of Marriage Act be repealed. I will have more to say about that as developments unfold.

Tax Due Dates