Fiscal Cliff Averted - Compromise Act Hurts Some - But Not that Much - Yet

We are migrating this blog to Facebook and our website.
Please visit www.facebook.com/senneysays and "Like" our page.
~Or~
Send your email address to: jsenney@pselaw.com to receive the latest blog by email.

The New Year's Eve "fiscal cliff" deadline came and went.  To avoid mandatory across-the-board budget cut scenario, the U.S. Senate and House of Representatives on January 1st adopted a compromise measure.  With some modifications targeting only “wealthy” taxpayers, the compromise act permanently extended certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The compromise act (ACT) permanently fixed the alternative minimum tax (AMT) problem and temporarily extended numerous other tax provisions that lapsed at midnight on December 31st or had already expired.

Noteworthy among the tax items not addressed by the Act was extension of the payroll tax “holiday” taxpayers had enjoyed in 2012.  The temporary lower 4.2% rate which had applied to the employees’ portion of the Social Security payroll tax was not extended and reverted to 6.2%.

Summary of the Compromise Act
The Act included the following provisions:

• For most taxpayers, income tax rates remain unchanged at the 2001/2003 levels.
• Individuals earning more than $400,000 and couples earning more than $450,000 are subject to a higher 39.6% top marginal rate.
• These same upper-income taxpayers face an increase in capital gains and qualified dividend tax rates from 15% to 20%.
• Individuals earning more than $250,000 and couples earning more than $300,000 are subject to a phase-out on personal exemptions and itemized deductions.
• The tax rate on large estates (estates valued over $5 million for individuals and $10 million for couples, indexed for inflation) rises from 35% to 40%, the estate and gift tax regimes remain unified, and spouses continue to have access to unused estate tax exemption amounts (so called portability).
• The alternative minimum tax (AMT) is permanently adjusted for inflation, preventing more families from being subject to AMT.
• 401(k) and other defined contribution retirement plans are permitted to provide plan participants with  expanded opportunity to convert pre-tax savings in such plans into Roth savings.
• The IRA charitable rollover provisions are extended for 2012 and 2013 (with ability to use the provision for 2012 distributions).
• Unemployment benefits are extended for one year.

However, many other issues, such as budget and entitlement cuts were not addressed however in the Act.  If you have questions or comments concerning the fiscal cliff compromise Act, call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.  Starting January 1, 2013, each person will pay a special Medicare tax ( in addition to his/her regular income tax) equal to 3.8% of the amount that certain items of net investment income cause the taxpayer(s) adjusted gross income to exceed $250,000 (for joint filers) or $200,000 (for non-married filers).  In addition, starting January 1, 2013, each person will pay an additional 0.9% Medicare tax on wages and self-employment income in excess of various threshold amounts. The threshold amount for married individuals filing jointly is $250,000 ($125,000 if they file separate returns), and $200,000 for single individuals.  Call or email me to discuss any questions you have concerning these extra taxes at 937-223-1130 or Jsenney@pselaw.com.