As 2012 came to a close , Americans were bombarded with stories about the impending fiscal cliff and the potential doom that our country and economy would incur if we went over this cliff . The fiscal cliff was simply a combination of automatic spending cuts and tax increases that were scheduled to go into effect immediately in 2013 unless Congress and the President could come into agreement on income taxes and government spending levels .
In the 11th hour , the Congress & President Obama passed the American Taxpayer Relief Act of 2012 that dealt with the income tax portion of this fiscal cliff . They never did deal with the government spending levels . This issue has been pushed to the side for now .
If we went over the fiscal cliff , then all taxpayers would have seen their taxes increase . Instead , the 2012 Act only increases taxes on the top 1 % of taxpayers . Though it ’ s worth noting — only 51 % of Americans pay income taxes at all . In addition , the 2012 Act makes most of the tax law changes permanent thereby eliminating a future fiscal cliff caused by changes in the income taxes laws .
Income Taxes Prior to 2001 , the Federal Income Tax brackets for individual taxpayers ranged from 15 % to 39.6 %. Starting in 2001 , a 10 % bracket was carved out of the 15 % bracket reducing income taxes for low-income taxpayers . Furthermore , all brackets above 15 % were reduced 3-5 basis points . For example , the 39.6 % bracket became the 35 % bracket .
The 2012 Act will keep these brackets intact . However , a new 39.6 % bracket will be added for higher income taxpayers . These are defined as single taxpayers with taxable income above $ 400,000 or married filing joint above $ 450,000 .
Payroll Taxes The 6.2 % Social Security Tax and the 1.45 % Medicare Tax are commonly referred to as payroll taxes . Both of these payroll taxes are withheld from an employee ’ s wages . The employer then must match this same amount and remit the entire amount to the IRS . Self-employed taxpayers must pay both the employee and the employer taxes based on their net self-employed income . This is commonly referred to as the self-employment tax .
For 2010 & 2011 , the employee ’ s portion of the Social Security tax was reduced from 6.2 % to 4.2 %, thereby giving all employees and self-employed taxpayers an immediate pay increase equal to 2 % of their wages .
The 2012 Act did not extend this reduction to the Social Security taxes . Therefore , the employee portion of the Social Security tax reverts back to 6.2 % of wages .
Capital Gains Taxes The tax law has always provided for a lower tax rate for long-term capital gain ( LTCG ) income . LTCG income is defined as the gain from the appreciation of investments held longer than one year . In 1997 , this tax rate was decreased from 28 % to 20 %, and , in 2003 , it was further reduced to 15 %. In addition , low income taxpayers paid a 0 % tax rate on most or all of their LTCG income .