Zaher Fallahi, Tax Attorney, CPA; Fiscal Cliff Averted, So What?
January 1, 2013, Congress reached a tax deal around 11:00 PM, Eastern Standard Time. The so called “fiscal cliff”; HR 8 or the Tax Relief Extension Act (the Act), or American Taxpayer Relief Act (ATRA) passed by 257 to 167 votes of the US House of Representatives. 85 House Republicans and 172 Democrats voted in favor while 151 Republicans and 16 Democrats were opposed. This bill had passed by the members of the US Senate previously by 89 to 8 votes. With certain exceptions, the Act essentially extended the 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), collectively referred to as the “Bush Era Tax Cuts”. The Congressional Budget Office estimates that this bill would add $329 billion to 2013 budget deficits and approximately $3.9 trillion to the deficits over the next 10 years. The next step for the bill is its signing by President Obama so that it would become law. The bill postponed the scheduled government spending cuts for the next two months, which means the lawmakers and the President must be working on another significant package within the next 60 days. Simply put, the bill has not addressed the real economic issue facing the nation.
Here are the highlights:
No tax increase for single individuals making less than $400,000 a year, married individuals filing jointly making less than $450,000 and married spouses filing separately making less than $225,000. The taxpayers with taxable income in excess of these thresholds would pay additional
4.60 %= (39.60-35.00) in taxes on the excess amounts, not the whole amounts.
Itemized Deductions Phase-Out
The phase-out of a taxpayer’s itemized deductions and personal exemptions returns in 2013, for those taxpayers with Adjusted Gross Income of $300,000 for married taxpayers, $250,000 for single taxpayers and $275,000 for the heads of household.
The Mortgage Forgiveness Debt Relief Act was extended
Under the Mortgage Forgiveness Debt Relief Act of 2007 (Section 108 of the Internal Revenue Service), the majority of the people selling their primary residence through short sale or foreclosure will not pay taxes for up to $2 million of debt forgiveness. This is such a big sigh of relief for the homeowners whose primary residences were financially up-side down, and for the real estate professionals who feared that this exclusion may not be extended beyond December 31, 2012.
Mortgage Insurance Premiums
Mortgage insurance premiums treated as qualified residence interest, Section163 (h), extended through 2013.
Compensation Raise for Members of the Congress
The members of the congress will not get the 2013 scheduled salary increase.
Comment: This is a small step in the right direction, although, too little too late. There is no doubt that our elected officials of the both executive and legislative branch, Democrats and Republicans, have failed us by causing such a financial disaster. When executives in private sector cause injury to their organization, they are held accountable for their conduct, terminated, demoted, penalized, or may be put on trial, depending on the degree of negligence, mismanagement or recklessness. It is advisable that the same rule apply to the people running the government. I believe everyone responsible for creating this “fiscal cliff”, members of the current Administration or any prior ones should be held accountable for their conduct. This includes lawmakers from both parties, who appropriated funds for exuberant expenditures without identifying the source of revenue to pay for them, executives who acted improperly, imprudently and incompetently, and economic advisers involved in devising both monetary and fiscal policies leading to such dilemma. Each one of these authorities should be reminded that by their act they are mortgaging the future of the children of this country.
Long-term unemployment benefits
The Federal Long-term unemployment compensation is extended for one year. This is a real treat for the unemployed people whose benefits ended the last week of 2012.
Capital Gains Tax
Capital Gains and Dividends tax rates will increase from 15% to 20% for taxpayers with taxable income in excess of the thresholds mentioned above. The rate will remain 15% for the middle class and the taxpayers in the 10% and 15% bracket still pay zero taxes on their Capital Gains.
Estate and Gift Tax
The estate and gift tax exclusion amount will be the $5,000,000. However, the rate will increase from 35% to 40 %. The estate portability election where a surviving spouse uses the unused portion of the deceased spouse’s exemption amount is available through an election.
Alternative Minimum Tax Patch-Up
Alternative Minimum Tax (AMT) that hits most middle class families with additional taxes will be adjusted for inflation. The 2012 amounts were $78,750 and $50,600 for the married filing jointly and filing separately taxpayers, respectively.
The withholding tax on gains on the disposition of US real property interest by partnerships, trusts, or estates that are passed through to partners or foreign beneficiaries was made permanent and the amount increased to 20%. Background: The Foreign Investment in Real Property Tax Act of 1980 otherwise known as FIRPTA imposes income tax on foreign persons disposing of United States Real property interest. The Tax is imposed at regular tax rates for the type of taxpayer on the amount of gain considered recognized. Purchasers of real property interests are required to withhold tax on payment for the property. Withholding may be reduced from the standard 10% to an amount that will cover the tax liability, upon application in advance of sale to the IRS. FIRPTA overrides most non-recognition provisions as well as those remaining tax treaties that provide exemption from tax for such gains. Note: Acquisition of the US real property interest by foreign persons from the countries under the US sanctions is subject to the US Treasury Office of Foreign Assets Control (OFAC) regulations.
Bonus and Section 179 Depreciation
50% bonus and section 179 depreciation is extended through 2013. In addition, some transportation and longer period production property is eligible for 50% bonus depreciation through 2014.
Medical professionals will be protected for a year from the scheduled compensation loss for treating Medicare recipients.
Subsidies for milk producers are extended.
Tax Credits are extended for: Renewable energy companies, Child Care for five years, Earned income for five years, Education for five years, Cellulosic biofuel production, Biofuel and renewable diesel, Research & Development has been retroactively reinstated to cover calendar year 2012 and prospectively extended to cover calendar year 2013, Personal residence energy efficient improvement and appliances extended for a year, and others.
The following temporary provisions under EGTRRA extended permanently
Marriage penalty relief, Adoption Credit, employer provided educational assistance, interest on student loan deduction special rates for accumulated earnings tax and personal holding tax; modified tax treatment for electing Alaska Settlement Native Trusts, etc.
2013 New Taxes
End of Payroll Tax Holiday
Two years ago the employees’ share of the social security (Old Age, Survivors and Disability Insurance) was reduced from 6.2 % to 4.2%. This added 2% of the wage earners’ payroll amount to their disposable income, which was considered a major contributor to the economic growth of the country. Some economists that ending such deduction would dampen the Gross National Products (GNP) by 2%, because almost all of this extra money used to be spent and helped the economy. This issue was not included in the Act and ended at December 31, 2012.
New Medicare Tax Hospital Insurance Tax on High-Income Taxpayers
Effective January 1, 2013, the employee share of FICA withholding from wages will increase from 1.45% to 2.35% on wages in excess of $250,000 for joint filers and $200,000 for married taxpayers filing separately. The extra tax is imposed on the combined salaries of the spouses for joint filers. This applies to the self-employed individuals as well.
Medicare Tax on Investment Income
A new 3.8% Obama-Care tax on net investment income on the lesser of
- a) A taxpayer’s net investment income is the investment income reduced by applicable associated cost; interest, dividends, rents, annuities, royalties, and net capital gains from disposition of property not used in a trade or business, or
- b) Modified Adjusted Gross Income (adjusted for foreign earnings)
that exceeds the threshold of $250,000 for married filing joint taxpayers, or $200,000 for single taxpayers. This applies to estates and trusts on theirs undistributed net investment income.
Itemized Medicare Deduction
The threshold for itemizing unreimbursed medical expense increase from 7.5% to 10% of AGI for regular income taxes. This is not effective for the years 201-2016 if the taxpayer or spouse turned 65 before the year-end.
Effective January 1, 2013, the amount of salary reduction contribution that an employee may elect to make to a health flexible spending program is limited to $2,500.
Good luck and have a prosperous New Year.