Fiscal Cliff Averted? How? What did they do?
02 January 2013 / Uncategorized / Comments Off on Fiscal Cliff Averted? How? What did they do?
Fiscal Cliff Averted? How? What did they do?
After falling off the cliff for one day, the House and Senate took action to avert the full force of some $600 billion in spending cuts and tax hikes that were scheduled to take effect throughout 2013, preventing a fiscal shock that some economists thought would be enough to put the U.S. economy back into a recession.
The legislation will avoid most of the scheduled tax hikes for the large majority of taxpayers and will extended emergency unemployment benefits for one year. However, the legislation does not address larger budget issues such as deficit reduction, tax reform, or raising the debt limit. In addition, it delays the automatic cuts to defense and domestic spending for just two months. Thus the stage is set for another fiscal battle in 2013 as the U.S. approaches it statutory borrowing limit toward the end of February.
As the debt ceiling debate unfolds, it could test markets once again. So although we are not falling off a cliff at the moment, we are still on the brink.
Here are the tax changes of this bill:
Income tax rates. Permanently extends the lower tax rates and other tax cuts enacted in 2001 and 2003 for single filers with taxable incomes below $400,000 and joint filers with taxable incomes below $450,000. The top income tax rate will permanently increase from 35% to 39.6% (as scheduled under current law) for single filers with taxable incomes above $400,000 and joint filers with taxable incomes above $450,000.
Limits on exemptions and deductions for higher wage earners. Permanently reinstates the phase-out of personal exemptions (PEPs) and the limitation on itemized deductions (Pease) for single filers with adjusted gross income (AGI) above $250,000 and joint filers with AGI above $300,000.
Payroll tax. Restores the employee Social Security payroll tax contribution to 6.2% on income up to $113,700 in 2013. This payroll tax contribution had been temporarily reduced to 4.2%.
AMT (alternative minimum tax) patch. Permanently (THANK GOD!) extends the AMT patch with annual inflation adjustments.
Estate and gift tax. Permanently extends the lifetime estate and gift tax exemption of $5.12 million (with annual inflation adjustments), but increases the top tax rate from 35% to 40%. Provisions for spousal portability and reunification of the estate and gift tax are also permanently extended.
Capital gains and dividends. Permanently extends the 0% and 15% tax rates for long-term capital gains and qualified dividends for single filers with taxable incomes below $400,000 and joint filers with taxable incomes below $450,000. The top rate will permanently increase to 20% for filers with taxable incomes above these thresholds.
The new 3.8% Medicare tax enacted under the healthcare law is not repealed and takes effect as scheduled in 2013. The new 3.8% tax applies to single filers with modified AGI above $200,000 and joint filers with modified AGI above $250,000. As a result, the tax law will include four different rates for long-term capital gains and qualified dividends depending on the investor’s modified AGI and taxable income: 0%, 15%, 18.8%, and 23.8%.
Annual expiring provisions. Two-year extension (through 2013) of dozens of tax provisions that expired in 2011, including the ability to make tax-free rollovers from an IRA to a qualified charity. The charitable rollover provision includes two transition rules. The first would allow individuals who make qualified charitable rollover distributions in January 2013 to count the rollover as if it were made in 2012. The second would allow individuals who took a distribution in December 2012 to contribute that amount to a charity and count it as an eligible charitable rollover.
2009 stimulus-related tax relief. Five-year extension of certain tax credits enacted in the 2009 stimulus bill (e.g., the American Opportunity Tax Credit and enhancements to the refundability of the child and earned income credits).
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