Recovery Act Extenders. The Act extends for five years the following items that expired December 31, 2012:

• the American Opportunity tax credit, which permits eligible taxpayers to claim a credit equal to 100% of the first $2,000 of qualified tuition and related expenses, and 25% of the next $2,000 of qualified tuition and related expenses (for a maximum tax credit of $2,500 for the first four years of post-secondary education);
• the $3,000 income level for claiming the refundable child credit; and
• expansion of the higher earned income tax credit amounts for eligible taxpayers with three or more children, and increases in threshold phaseout amounts for singles, surviving spouses, and head of households.

Permanent AMT Relief. For tax years beginning after 2011, the Act permanently increases the AMT exemption amounts to $50,600 for unmarried taxpayers, $78,750 for married filing joint and $39,375 for married persons filing separately. In addition, for tax years beginning after 2012, it indexes these exemption amounts for inflation.

Capital Gain and Dividend Rates. For tax years beginning after 2012, the top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). Note that the 3.8% surtax on investment type income and gains will also apply so the overall rate for taxpayers in this income level will be 23.8%.

For taxpayers in tax brackets below 25%, capital gains and dividends will permanently be subject to a 0% rate. Taxpayers who are subject to a 25% or greater rate on ordinary income, but whose income levels fall below the $400,000/$450,000 thresholds, will continue to be subject to a 15% rate on capital gains and dividends. The rate will be at 18.8% for those subject to the surtax.

Highlights of fiscal cliff tax consequences. Absent from the legislation was the extension of the 2% reduction to the payroll tax that reduced the employee portion of the payroll tax from 6.2% to 4.2% for the last 2 years. As a result, as of January 1, 2013 the tax is back to 6.2%, a 2% tax hike for all workers earning under $113,700. The social security portion of the self-employment tax increases from 10.4% to 12.4% making the total SE tax 15.3%