The 112th Congress stayed in session through January 1, 2013, to address the Fiscal Cliff. The Fiscal Cliff, which has been a key issue in the news over recent months, was comprised of several different fiscal items – some were dealt with, some were not, and others were delayed:
- Bush Tax cuts (as amended) that reach back to 2001 and 2003 – are now permanent
- 2% Payroll tax cut – has not been renewed
- Sequestration, requiring mandatory across the board spending cuts – has been delayed 2 months
- Myriad of expiring credits, and patches – some extended, others made permanent
The American Taxpayer Relief Act of 2012 (“ATRA”) is now set to be implemented as we prepare for the first significant tax impacts of the Affordable Care Act (ObamaCare) with the imposition of a Medicare tax on both earned income and net investment income for high income individauls. The question that each of you has surely asked is what does all this mean to me. Unfortunately, the answer is more complicated now and will often be met with the unpopular phrase, “it depends.”
Key Individual Provisions
Some of the key provisions impacting individuals are:
- The Bush era income tax rates remain, with the addition of a new bracket for those over $400,000 (single)/$450,000 (joint)
- Phase out of exemptions and itemized deductions are reinstated for those with Adjusted Gross Income over $250,000 (single) / $300,000 (joint)
- Capital gains tax rates will go up as planned to 20%, but now this will only apply to individuals with taxable income over $400,000/$450,000
- Qualified dividends, previously taxed at capital gain rates and scheduled to go back to ordinary income rates, will stay unified with the new capital gain regime being taxed at 15%/20% depending on the overall income of the taxpayer
- Alternative minimum tax patch was made permanent and the exemption amount will now be indexed for inflation. While it continues to impact more taxpayers than initially intended when added to the tax law in 1986, it will not require Congressional action on an annual basis to limit its impact
- Estate/Gift tax previously scheduled to see significant changes will retain its lifetime exclusion of $5.0M (indexed for inflation) with maximum tax rates increasing but only to 40%, unlike the 55% that would have returned without action
- Tuition and education will continue to receive incentives through the 5 year extension of the American Opportunity tax credit, and the above the line deduction for tuition and classroom expenses were extended through 2013
- The option to deduct sales tax in lieu of state and local income taxes, a popular measure with those living in states without an income tax, was extended through the end of 2013
- The ability to make charitable contributions directly from your IRA for those over 70 ½ was extended for 2012 and 2013. Due to the timing of the passage, individuals have until February 1, 2013 to complete 2012 gifts
- For those individuals still seeking to sell their principal residence but are underwater on their mortgage, the exclusion for principal residence debt forgiveness income was extended through the end of 2013
Some of the rate changes are summarized in the chart below. As you can see, there are now graduated rates that apply to capital gain and qualified dividend income as well as ordinary income, and the new Medicare tax will be layered on top for some taxpayers.
Key Business Provisions
Businesses and their owners will also benefit from some provisions of the ATRA including:
- The extension of the 50% bonus depreciation through the end of 2013
- The Section 179 deduction limit of $500,000 (with a $2,000,000 threshold for additions) has been retroactively reinstated for 2012 and extended through the end of 2013
- The 15 year depreciable life, and qualification for bonus depreciation has likewise been retroactively reinstated for qualified leasehold improvements
- Research and development credits which have been awaiting renewal were also retroactively reinstated and extended through the end of 2013
- A myriad of business tax credits were extended through 2013 including most notably the Work Opportunity Credit
In conclusion, we can now say that due to the permanence of many of these tax provisions, we have returned to some predictability with regard to income tax rates, and the ability to tax plan. However, the Federal government continues to consider ways to reduce the deficit, balance the budget, and set the debt limit. Congress, and the White House also continue to say the tax code is ripe for comprehensive reform. So, stay tuned. 2013 is shaping up to be an exciting year.
