The Fiscal Cliff
The Fiscal Cliff
Bush Tax Cuts – Expiration of the two-year extension of the Bush tax cuts provided for in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Allowing the tax cuts to expire will cause over 70 other tax benefits to expire. Highlights include:
- · Individual tax (ordinary income)brackets –
- o Current 10% rate will increase 5% to 15% (10% bracket goes away)
- o Current 25% rate will increase 3% to 28%
- o Current 28% rate will increase 3% to 31%
- o Current 33% rate will increase 3% to 36%
- o Current 35% rate will increase 4.6% to 39.6%
- · Long term capital gain rates
- o Current 15% rate will increase 5% to 20%.
- · Qualified dividend rate
- o Current 15% will increase to ordinary income tax rates (15% – 39.6%)
- · Personal exemptions currently not being phased out will be reduced by 2% for each $2,500 of taxpayer’s adjusted gross income that exceeds a certain inflation adjusted threshold.
- · Itemized deductions currently not being phased out will be reduced by 3% for each $2,500 of taxpayer’s adjusted gross income that exceeds a certain inflation adjusted threshold.
- · Child care credit, adoption credit, and dependent care credit will be reduced.
- · Education incentives will either be eliminated or reduced.
Estate Tax Increase – Estate tax exemption will decrease from its current level of $5,120,000 to $1,000,000 and the tax rate will increase from its current rate of 35% to 55%.
Alternative Minimum Tax (AMT) – Reversion of the Alternative Minimum Tax thresholds to their 2000 tax year levels.
- · Unless another “patch” is passed, the AMT exemption amounts will drop for married individuals from $74,450 in 2011 to $45,000, and for unmarried from $48,450 in 2011 to $33,750. Unless Congress acts, 30 million plus taxpayers, or roughly one-fifth of all taxpayers, could be hit by AMT in 2012.
Social Security Payroll Tax Cut – Expiration of a Social Security payroll tax cut, most recently extended by the Middle Class Tax Relief and Job Creation Act of 2012 (MCTRJCA).
- · A 2 percent reduction on the first $110,100 of compensation received in 2012 has been extended through until December 31, 2012. On January 1, 2013 the two percent reduction will be eliminated which will result in a two percent increase in taxes.
Sequestration – Automatic spending cuts sequestration to most discretionary programs and defense are required by the Budget Control Act of 2011. These cuts have not been identified.
- · Congress failed to produce a deficit reduction bill with at least $1.2 trillion in cuts connected to the $1.2 trillion increase in the debt ceiling, so automatic across-the-board cuts are being triggered.
- o These cuts would apply to mandatory and discretionary spending in the years 2013 to 2021 and be in an amount equal to the difference between $1.2 trillion and the amount of deficit reduction enacted from the joint committee.
- o Exemptions:
- § Social Security, Medicaid, civil and military employee pay.
- § Medicare benefits would be limited to a 2% reduction (reductions would apply to Medicare providers).
Unemployment Benefits – Expiration of federal unemployment benefits, most recently extended by the Middle Class Tax Relief and Job Creation Act of 2012.
Obamacare – New taxes imposed by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010
- § Increase in Medicare Payroll Tax – A .9% tax increase to employees (not employers) in the Medicare payroll taxes on all wages over $200,000 for single/$250,000 for married taxpayers. This tax is not deductible.
- § Tax on Medical Device Manufacturers – A 2.3% excise tax will be charged to medical device manufacturers
- § High Medical Bills Tax – Medical expense deductions on must exceed 10% of adjusted gross income before they can be deducted. In 2012, medical expenses only needed to exceed 7.5% of adjusted gross income.
- § Flexible Spending Account Cap – Flexible Spending account that is unlimited will be capped at $2,500.
- § Employer Provided Retirement Drug Coverage – The tax deduction for employer provided retirement drug coverage is being eliminated in coordination with Medicare Part D.
Debt Ceiling – The government will run out of money before 2012, requiring Congress and the President to negotiate a bill acceptable to both.
Business Provisions Expiring – A short list is provided below
- · Specialty Assets Write Down – specialty assets currently written off over 15 years, including qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property (under §168(e)) will be written off over 39 years.
- · Bonus Depreciation – 100% bonus first-year depreciation allowance for qualified property under §168(k)(1) and §168(k)(5) will be eliminated.
- · §179 Expense – the expense election is increased to $500,000, with a $2 million investment ceiling.
- · Environmental Remediation Costs – these costs will no longer be deductible under $198(h).
- · Work Opportunity Tax Credit – the WOTC for non-veterans under Code Sec. 51(c)(4) will be eliminated.
- · Energy Efficient Homes Credit – credit for construction of new energy efficient homes under §45L will be eliminated.
- · Enhanced Charitable Deductions will be eliminated for:
- o contributions of food inventory under §170(e)(3)(C),
- o contributions of book inventories to public schools under §170(e)(3)(D), and
- o contributions of computers for educational purposes under § 170(e)(6)(G).
- · Empowerment Zone tax breaks will be eliminated
- o the designation of an empowerment zone and of additional empowerment zones under Code Sec. 1391(d)(1)(A)(i) and Code Sec. 1391(h)(2),
- o increased exclusion of gain on the sale of qualified business stock of an empowerment zone business under Code Sec. 1391(d)(1)(A)(i),
- o tax-exempt bond financing under Code Sec. 1394,
- o the 20% wage credit under Code Sec. 1396,
- o liberalized Code Sec. 179 expensing rules, and
- o deferral under Code Sec. 1397B of capital gains tax on sale of qualified assets sold and replaced.
- · Energy efficient appliances – credit for energy efficient appliances under §45M will be eliminated.
- 1. List of Expiring Federal Tax Provisions 2010 – 2020, Staff of the Joint Committee on Taxation, January 21, 2011.
- 2. An Overview of Tax Provisions Expiring in 2012, Congressional Research Service Report R42485.