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President Obama Signs Last Minute Agreement to Avert Fiscal Cliff

The tax side of the fiscal cliff has been averted. The American Taxpayer Relief Act allows the Bush-era tax rates to go up to 39.6% for taxpayers with incomes over $400,000 and families with incomes over $450,000. For the rest of us, the rates will remain the same, at least until Congress tackles a major overhaul of the Tax Code, as they have promised to do.

The Agreement permanently "patches" the Alternative Minimum Tax (AMT) and indexes the threshold according to the cost of living index. If the AMT "patch" hadn't been included in the Agreement many of our clients would have felt the impact. It is with a sigh of relief that we have a permanent solution.

The tax rates on capital gains and dividends will remain at zero to fifteen percent, except for those individuals with incomes over $400,000 and families with incomes over $450,000. Many of our clients have moved their investment portfolios into fixed income and to have this provision included in the Agreement is welcome relief.

Other important provisions of the Bush-era tax cuts have been made permanent, such as the Child Tax Credit, Earned Income Tax Credit and Child and Dependent Care Credit. The Married Penalty Relief and the American Opportunity Tax Credit have been extended through 2017. The Cancellation of Indebtedness Income for a Principal Residence has been extended through 2013.

The estate tax exemption has been made permanent at $5 million and will be inflation-adjusted annually. For a married couple the estate tax exemption is $10 million. If you are fortunate to have an estate higher than the exemption, the tax rate on the excess is 40 percent, up from 35 percent for 2012.

Temporary small business incentives were extended only through December 31, 2013. Uncertainity will continue to plague small business employers until Congress tackles the task of overhauling the Tax Code.