Compromise Bill Avoids/Defers Fiscal Cliff

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As you know by now, Congress approved a compromise bill intended to avoid the large tax increases and budget cuts that were otherwise scheduled to take effect in 2013. The bill raises taxes by about $600 billion over 10 years and delays for two months across-the-board cuts to the federal budget.

Income Tax
The bill extends the current income tax rates on incomes up to $400,000 for individuals, $450,000 for couples. Taxpayers with earnings above those amounts would be taxed at a rate of 39.6%, up from the current 35%. The bill also extends the current caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.

Estate Tax
Under the bill, estates would be taxed at a top rate of 40%, with the first $5 million in value exempted for individual estates and $10 million exempted for family estates. In 2012, such estates were subject to a top rate of 35%.

Capital Gains and Dividends
Under the bill, the tax rate on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for joint-filers would increase from 15% to 20%.

Alternative Minimum Tax
The bill permanently addresses the alternative minimum tax and indexes AMT for inflation.  This change is expected to prevent 30 million middle and upper-middle income taxpayers from being subject to AMT.

Unemployment Benefits
The bill extends jobless benefits for the long-term unemployed for another year.

Medicare Reimbursements for DoctorsThe bill delays a 27% cut in Medicare reimbursements to doctors for one year.

Social Security Payroll Tax Cut
The bill eliminates the 2% payroll tax cut that was enacted two years ago, thereby restoring the payroll tax to 6.2%.

IRAs
401(k) and other defined contribution retirement plans could provide plan participants with a newly expanded opportunity to convert their pre-tax savings in plans into Roth savings.  The IRA charitable rollover provision would be extended for 2012 and 2013 (with special ability to make use of the provision for 2012 distributions).

Other Changes
The bill extends for 5 years the child tax credit, earned income tax credit, and the $2,500 tax credit for college tuition.  The bill also extends for 1 year accelerated "bonus" depreciation of business investments in new property and equipment, the tax credit for research and development costs and the tax credit for renewable energy.

Across-the-Board Cuts
The bill delays for two months across-the-board spending cuts worth an estimated $109 billion set to start striking the Pentagon and domestic agencies.  Cost of $24 billion is divided between spending cuts and new revenues from rules changes on converting traditional individual retirement accounts into Roth IRAs.


AND ONE MORE THING.  Don’t forget that that the recent compromise bill does not affect the 3.8% Medicare tax on “net investment income” that was imposed starting in 2013 by the 2010 Affordable Health Care Act.  The tax is generally levied on nonbusiness income from interest, dividends, annuities, royalties, rents, and capital gains of taxpayers with adjusted gross income in excess of $250,000 (for joint filers) or $200,000 (for single filers).  So in 2013, taxpayers with incomes over the income thresholds will be paying tax on capital gains and dividends at a combined rate of 23.8%.