Fiscal Cliff Deal Finally Reached

By Steve Barlotta, CPA

Well, our lawmakers finally passed a budget agreement that partially resolves the “fiscal cliff” impasse. The act addresses some of the tax issues that were left unresolved last week. The bill now goes to President Obama for his signature. Here are some highlights of the deal:

Individual Tax Rates. Permanent extension of current rates on income below $400,000 for single tax filers, and $450,000 for married joint taxpayers. A new top tax rate of 39.6% is imposed on taxable income over $400,000 for single filers and $450,000 for married taxpayers filing jointly.

Capital Gains and Dividends. Permanent 15% rate on capital gains and dividends for income below $400,000 for single tax filers, and $450,000 for married joint taxpayers. A new top tax rate of 20% is imposed on taxable income over $400,000 for single filers and $450,000 for married taxpayers filing jointly. If upper income taxpayers are subject to the new Medicare tax on investment income, the top rate could increase to 23.8%.

Estate and Gift Tax. The amount that is excluded from estate and gift tax is retained at $5 million and indexed for inflation. However, the top tax rate for estate and gift taxes increases from 35% to 40%. The right to leave your unused estate and gift tax exemption to your surviving spouse was also made permanent.

Alternative Minimum Tax (AMT). The “AMT patch” issue is resolved. The exemption amount for the AMT on individuals is permanently indexed for inflation. In 2012, the exemption for married filing joint taxpayers will be $78,750, and $50,600 for single filers.

Phaseout of Itemized Deductions and Personal Exemptions. The phaseout for itemized deductions and personal exemptions are reinstated for single taxpayers at $250,000, and $300,000 for married taxpayers filing jointly.

Social Security Payroll Tax. The temporary lower 4.2% rate for employees’ share of Social Security payroll tax has not been extended. Effective January 1, 2013, the rate reverts back to 6.2%. If you’re self-employed, the Social Security tax component of the self-employment tax will increase from 10.4% to 12.4%.

Other Highlights

• Marriage penalty relief permanently extended.
• Child and dependent care credit rules permanently extended.
• The American Opportunity tax credit for qualified tuition and education costs extended through 2018.
• Tax-free distributions from individual retirement plans for charitable purposes extended through 2013.
• Above-the-line deduction for qualified tuition and related costs extended through 2013.
• The exclusion from income of discharge of qualified principal residence indebtedness extended through 2013.
• Credit for energy-efficient new and existing homes extended through 2013.
• Credit for energy-efficient appliances extended through 2013.
• For businesses, the increased expensing under Section 179 and the availability of the additional 50% first-year bonus depreciation is extended through 2013.

It should be noted that this particular agreement only partially addresses taxes and totally pushes off the hard decisions that need to be made on spending and the debt ceiling. Additionally, some Democrats have stated that they’re not done trying to raise taxes further and will look at closing loopholes. Also, according to the Congressional Budget Office, this deal, as it stands now, cuts only $15 billion in spending while increasing tax revenues by $620 billion over a ten year period. That’s a 41:1 ratio of tax increases to spending cuts, which is a far cry from the “balanced approach” President Obama preached last week and does far too little to control our massive deficits.

Source: Journal Of Accountancy, Congress Passes Fiscal Cliff Act, Paul Bonner and Alistair, M. Nevus, January 1, 2013.