For at least two years, the estate and financial planning world has been at the edges of our seats waiting to find out how Congress would handle the phenomenon that was the fiscal cliff. On New Years Day, Congress finally passed the American Taxpayer Relief Act (the Act), legislation that addressed many of the fiscal cliff concerns (at least temporarily in some cases) and kept the US from “falling off the cliff."  If nothing had been done by Jan. 1, 2013, taxes would have increased for most Americans, many middle class incentives would have expired and several harsh mandatory budget cuts would have begun to take effect, basically eliminating many social services that Americans rely on.  Many experts believed that the economic effects of these changes would have been devastating.

Fortunately, we can all breathe a collective sigh of relief.  In general, the Act provides very few surprises.  It raises taxes on some high income Americans and keeps taxes at lower rates for most Americans.  It extends many middle class tax incentives, as well as business-friendly credits and incentives.  In addition, the Act postpones for two months any budget cuts that would have been in effect as a result of the sequester.

What's in the Act:

1. Extends Bush tax cuts for most Americans

The legislation permanently extends the Bush tax cuts for most Americans.  In other words, the low tax rates that we've all enjoyed since 2001 will continue to be in force permanently.  Individuals who make less than $400,000 will be taxed at those rates (top ordinary income tax rate of 35 percent, 15 percent capital gains and dividend tax).  In addition, it preserved the 0% capital gains and dividend tax on individuals in the 10 percent to 15 percent tax brackets.

2. Raises taxes on the wealthy

The Act raise taxes on individuals who make $400,000 or more and families that earn $450,000 or more.  The Bush tax rates were not extended to these individuals and families, so their top tax rate is 39.6 percent with capital gains and dividends taxed at 20 percent.  Also note that beginning in 2013, there is an additional tax imposed on investment income thanks to the health care bill.  Families who make $250,000 or more will have to pay an additional 3.8 percent tax on capital gains, ordinary income, dividends, royalties and interest on amounts above the $250,000 threshold.  So, for some unlucky (but wealthy) few—their ordinary income tax rate could be almost 44 percent and 23.8 percent tax on capital gains and dividend income.

3. Limits to deductions and personal exemptions are back

In addition, taxes get even more complicated for higher income Americans—even those who make less than $400,000—because the legislation brings back 2 tax provisions that were frozen by the 2001 Bush legislation.  The personal exemption provision (PEP) reduces or eliminates the benefit of the personal exemption for high-income earners, and the Pease provision greatly reduces the ability of high earners to make certain deductions. These provisions will apply to individuals who make $250,000 or more and families who earn $300,000 or more a year.

4.  Sets estate tax and exemption

The Act also addresses and makes permanent the estate tax rate and estate tax exemption, another set of taxes that were in flux over the past 10-12 years because of their temporary status.  The new legislation permanently sets the estate tax (as well as the gift and generation-skipping-transfer taxes) at 40 percent and thereafter adjusted for inflation.  The estate exemption—or the amount of a decedent's estate exempt from tax—remains at $5 million (for couples it’s a cool $10 million).  This means that wealthy families can continue to shelter up to $10 million of the estate from tax and then pay a 40 percent tax on the remainder.  In addition, the Act made permanent the portability provision.

5. Extends middle class incentives

The Act also extends several middle class tax credits and incentives for education and families.  It extends for 5 years the American Opportunity Tax Credit, the Child Tax Credit and the Earned Income Credit.

6. Extends the AMT patch

It also makes permanent the AMT patch (which is an alternative tax provision intended to make sure that the wealthy pay their fair share in taxes, but because it was never adjusted for inflation when it was created, it has slowly been creeping into the middle class).  The legislation allows for the AMT to be adjusted for inflation going forward.

7. IRA contributions to charity

The Act brought back the allowance of individuals age 70 1/2 and older to donate up to $100,000 from their individual retirement accounts to a qualified charity.  This provision applies to the 2013 tax year and is retroactive to 2012, provided the taxpayer makes the contribution by Jan. 31, 2013.  Note that while the contribution to charity will not qualify for a charitable deduction, the amount will also not be includable in the gross income of the donor.

8. The legislation also extends unemployment benefits for workers who would have otherwise run out of benefits this year.

9. Payroll tax holiday

The Act did NOT extend the payroll tax holiday.  This was instituted two years ago by the Tax Act of 2010 and allowed a tax break to virtually every working American.  During normal tax years, every worker must pay 6.2 percent Social Security tax on  income.  The 2010 Tax Act cut this tax by 2 percent, saving Americans about $10-20 in taxes per paycheck.  The recent legislation did not extend this tax holiday, so this year every worker is back to paying the full 6.2 percent on up to $113,000 of their income, at most an additional $2274 in taxes annually.

The Act did not cover any significant budget cuts, entitlement reform, meaningful deficit reform or corporate tax reform.  Many, if not all, of these issues will be addressed shortly, however, as Congress gets ready for its next major rumble when the government hits the debt ceiling in March.