By Lori Capullo
After the drama leading up to the fiscal cliff, what has really changed? Five things you need to know, heading into tax season:
1. The Bush-era tax cuts are now permanent — except for taxpayers in the highest tax bracket. Republicans wanted this to affect only those taxpayers earning over $1 million, while President Obama was aiming for the top tax rate to affect those earning over $200,000 or $250,000. The result was a compromise of $400,000 for taxpayers filing single as the threshold for the top tax rate, which is very close to what the top tax bracket would have been anyway, due to inflation.
2. As you’ve already discovered, your paycheck is smaller. With the elimination of the temporary cut to payroll taxes that came about with President Obama and Congress’s stimulus bill in 2010, employees earning less than $110,100 are once again paying what they did before the cut came about. On the other hand, those earning more than that pay no more tax than taxpayers earning the maximum, which essentially lowers their payroll tax rate.
3. You can now save more for retirement and enjoy tax benefits at the same time. The maximum amounts you can contribute to various retirement accounts have been increased. The contribution limit to 401K, 403b and 457 accounts is now $17,500; to a simple IRA, it’s $12,000; and to a traditional IRA and Roth IRA, it’s $5,500.
4. Donate more, keep more. Congress has also extended the option for traditional IRA owners age 70½ or older to make tax-free charitable contributions of up to $100,000 directly from their traditional IRAs, but that option is only available (so far) through 2013.
5. Give and you shall receive. The gift tax annual exclusion amount increases to $14,000 this year, so you can give up to $14,000 annually (or $28,000 for spouses splitting gifts) to any number of people without having to pay tax on the gifts. You can also give unlimited amounts toward tuition or medical expenses if you pay the learning institution or provider directly.
SOURCES: Schwab.com; IRS.gov; CBS News; money.cnn.com