Congress and President Avert “Fiscal Cliff” at Eleventh Hour
Many Pre-Existing Tax Cuts Extended for all but those in Top Tax Brackets; Automatic Federal Spending Cuts Delayed for Two Months
On January 1, 2013, the U.S. House and Senate passed legislation, signed the next day by the President, to avoid tax increases and federal spending cuts scheduled to begin in 2013. In combination, these scheduled measures were known as “the fiscal cliff.”
The legislation, “The American Taxpayer Relief Act of 2012 (‘H.R. 8’),” allows tax rates to rise on the nation’s highest earners while also extending dozens of tax cuts to individuals and businesses. It is expected to generate approximately $600 billion in new revenue over 10 years, according to various estimates. The bill also delays scheduled automatic cuts in federal spending for two months as the new Congress grapples with next steps in deficit reduction.
Key Features of H.R. 8
The bill raises the top tax rate to 39.6% for married couples earning $450,000 and single taxpayers earning $400,000. These amounts will be indexed for inflation. (The 39.6% rate is from the Clinton era.)
The bill raises long-term capital gains and the qualifying dividends tax rate to 20% (from 15%) for taxpayers in the 39.6% tax bracket for regular and alternative minimum tax.
Bush Tax Cuts
The bill permanently extends Bush-era tax cuts from 2001 and 2003 for all other taxpayers.
The bill reinstates the phase-out of personal exemptions and an overall limitation on itemized deductions for married couples filing jointly earning over $300,000 and single taxpayers earning over $250,000.
The bill raises the maximum estate tax rate to 40% but keeps the exemption amount at $5 million, adjusted for inflation. The first $10 million is exempt for family estates. (The current rate is 35% but the proposed Obama Administration figure was closer to 45% and topped out at 55%.)
Higher Education and Dependents
The bill extends for five years (through 2018) the American Opportunity Tax Credit to pay for higher education, and special relief for families with three or more children for the refundable portion of the child tax credit and increased percentage for the earned income tax credit.
Alternative Minimum Tax (“AMT”)
The bill “patches” the AMT for 2012 and adjusts the exemption amount for inflation going forward.
The bill extends through 2013 the following individual tax benefits:
1) Above the line deduction for teacher expenses,
2) Relief from cancellation of debt income for principal residences,
3) Parity for employer-provided mass transit benefits,
4) Deductions for mortgage insurance premiums as interest, state and local sales taxes in lieu of income taxes, above the line deductions for qualified education expenses, and
5) Tax-free distributions from IRA accounts for charitable purposes.
The bill extends through 2013 certain business tax provisions that expired at the end of 2011 including:
1) The research credit,
2) The new markets tax credit,
3) Railroad track maintenance credit,
4) Mine rescue team training credit,
5) Work opportunity credit,
6) The Section 179 asset expensing at $500,000,
7) Section 1202 stock exclusion at 100%, and
8) Empowerment zone incentives.
The bill extends 50% bonus depreciation through 2013.
The bill extends through 2013 certain energy tax incentives that expired at the end of 2011, including:
1) Energy efficient credit for existing homes,
2) Alternative fuel vehicle refueling property credit,
3) Biodiesel and renewable diesel incentives,
4) Wind credits,
5) Energy efficient credit for new homes, and
6) Credit for manufacture of energy efficient appliances.
The bill extends unemployment insurance for a year for two million people.
The bill continues reimbursements for doctors who take Medicare patients, but funds will not come from implementation of the Obama Administration’s new health care law.
Leech Tishman’s Taxation Practice Group provides creative tax planning strategies to individuals, publically owned companies, closely held businesses and non-profit organizations/private foundations. Our lawyers have over 35 years of experience in corporate and tax law matters and practical knowledge in financial accounting. With an intricate understanding of federal, state, and local tax laws, along with up-to-date knowledge of sophisticated tax planning techniques, we assist individuals and businesses in many industry sectors with forming a tax plan that minimizes their risk and enhances their bottom lines. Please contact Leech Tishman if you have any questions regarding the implications of H.R. 8, or any other tax issue.
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Resources: Information for this client alert derived from Bloomberg BNA Tax and Accounting Center and CNN.