The "American Taxpayer Relief Act" was passed by the Senate in the wee hours of January 1, 2013, and then later in the evening of that day, passed by the House and signed by the President in Hawaii on January 2, 2013. This "fiscal cliff" legislation with great political and press drama may have pulled the country out of a self-created fiscal/political ditch, but the country is still on the edge of the fiscal cliff with spending cut issues, debt ceiling issues and undoubtedly more tax issues to be dealt with before March 1, 2013.
The Act increases the income tax on individual taxpayers with taxable income above specified ("high income") thresholds (generally stated to be $400,000 or $450,000 which are adjusted for inflation). Note, limited liability companies are now the predominate form of closely held business in the U.S. and a source of much of the U.S. job growth. LLC income that is retained by the business nevertheless is included in the owners' individual taxable income subject to this tax increase.
The legislation also:
- phases out personal exemptions and phases down itemized deductions for taxpayers with income above $250,000 (individual filers), $300,000 (married filing jointly and surviving spouses), $275,000 (head of households) or $150,000 (married filing separately);
- increases the capital gains tax rate for such taxpayers;
- retains the $5 million estate and gift tax exclusion (but raises the maximum rate to 40%);
- provides a permanent, indexed and higher alternative minimum tax exemption; and
- has a large number of "extenders" for provisions that generally expired at the end of 2011 to carry them through 2013.
IRA distributions to charity in the month of January 2013 can be treated as if made in 2012. Many of the extenders are "focused" to narrow constituent interests but many are of broad application:
- The option to deduct state and local sales tax in lieu of income tax remains for 2012 and 2013 (important for Tennesseans and citizens of other states without an income tax);
- 50% bonus depreciation for 2012 and 2013;
- R&D credit for 2012 and 2013;
- Expensing of up to $500,000 of certain property is permitted for 2012 and 2013;
- Exclusion for forgiven home mortgage debt in 2013.
The legislation did not postpone the 2% of wage increase in the employee portion of the social security payroll taxes so all taxpayers regardless of income level will feel some pain (commentators estimate an average of $700 per taxpayer). The 3.8% Medicare contribution excise tax on investment income for taxpayers with adjusted gross income in excess of $250,000 remains as does the scheduled increase in the capital gains tax rate to 20% for a total capital gains tax on those with the high income of 23.8%. Dividends are taxed in the same manner as capital gains.
In addition to the tax provisions there are many Medicare and other health extensions and reimbursement adjustments as well as an extension of the emergency unemployment compensation program and related benefits. The Act provides that Congress will not receive a cost of living increase for 2013.
Finally, the 2013 sequestering called for by the Balanced Budget and Emergency Deficit Control Act of 1985 as modified in 2011 is deferred from January 2, 2013, to March 1, 2013. In accordance with the President's remarks at 1:45 Eastern Standard Time on December 31, 2012, it is anticipated there will be further tax law changes accompanying any spending cuts.
Read a full overview of the many tax provisions in the Act here.
Originally published in Tennessee Society of Certified Public Accountants, 10 January 2013
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