The Fiscal Cliff Tax Bill
Congress has sent what I'm calling the Fiscal Cliff Tax Bill to the President for his signature this morning. I expect that he will sign the bill and it will become tax law. Here are some of the important areas that are included in the bill.
Congress passed a permanent Alternative Minimum Tax (AMT) patch, adjusted for inflation! This patch is made retroactive to 2012 and it is an important, permanent, change to the AMT formula; and making provisions of the AMT adjust for inflation means that this alternative-tax system we have will likely not be a middle-income tax problem in the future.
Now, looking at the changes for 2013 and beyond, the top income tax rate goes to 39.6% (from 35%) and it will be imposed on individuals making more than $400,000 at year ($450,000 for a married couple). The capital gains reported by those affected by the higher rates will now be taxed at 20% (instead of 15%). Also, gone immediately, is the 2% Social Security reduction for everyone. This means that if you are an employee the Social Security withheld from your wages beginning January 1st will be the full 6.2% instead of the lower 4.2% of 2012.
For taxpayers who itemize, the old "itemized deduction phase-out" is reinstated as is the personal exemption phase-out. The thresholds where these phase-outs happen is different than it was in the past. For 2013 the phase outs begin with Adjusted Gross Income (AGI) of $300,000 for married, joint filing taxpayers, $275,000 for head of household and $250,000 for single filers.
The estate tax system will continue forward and the exemption is an inflation-adjusted $5 million (effectively $10 million for married couples). The tax rate on estates will now go to 40%, which is up from the 2012 rate of 35%,
The following tax credits were extended: the $1,000 Child Tax Credit, the enhanced Earned Income Tax Credit and the enhanced American Opportunity Tax Credits are all extended through 2017.
In addition to the above items, these deductions and exclusions are extended through 2013:
o Discharge of qualified personal residence exclusion;
o $250 above-the-line teacher deduction;
o Mortgage insurance premiums treated as personal residence interest:
o Deduction for state and local taxes;
o Above-the-line deduction for tuition; and
o IRA-to-Charity exclusion (plus special provisions allowing transfers made in January 2013 to be treated as made in 2012).
The legislation also included the following business provisions –
o The Research Credit and the production tax credits, among others, will be extended through 2013;
o 15-year depreciation and Section 179 expensing allowed on qualified real property through 2013;
o Work Opportunity Credit extended through 2013;
o Bonus depreciation extended through 2013; and
o Section 179 deduction limitation is $500,000 for 2012 and 2013.
This is a typical tax bill in that it contained lots of completely non-tax provisions and so-called port-barrell spending but, hey, they got something out! As we analyze the bill's provisions in more depth we will keep you informed and alerted to tax planning and saving moves you can make.
Jeremiah K. Murphy, CPA is an accounting firm providing tax services, audits and business consulting.