Fiscal Cliff Tax Changes

by Michael on Jan 1, 2013 · 1 comment

Image of Falling Dollar Signs

Well… Congress technically let us go over the fiscal cliff, though the Senate has now passed legislation to address the situation.

The House should consider it soon and, after some pontificating, I expect it (or something very similar) to pass — perhaps narrowly — and to be signed into law.

So… What exactly did they agree on once they finally got around to agreeing?

Here’s a summary of the high points from a tax perspective:

Income tax brackets: The Bush era tax cuts will be retained for all those earning less than $400k/450k (single/couples). Those above that level will be greeted with a “new” 39.6% tax bracket (the same as the top rate during the Clinton years).

Payroll taxes: The 2% payroll tax cut will be allowed to expire, as it was originally intended to do at the end of 2011. Thus, your Social Security taxes will return to 6.2% vs. the 4.2% that you’ve enjoyed the past couple of years.

Alternative Minimum Tax (AMT): The AMT has been patched and (wisely) indexed to inflation, thereby obviating the need to patch it every single year going forward.

Capital gains and dividends: Long-term capital gains and qualified dividends will now be taxed at a top rate of 20% vs. 15% for amounts in excess of the $400k/$450k income threshold mentioned above.

Roth conversions: To help pay for the delayed spending cuts (see below), those with 401(k) or 403(b) plans will apparently be able to convert those funds into a Roth account at any time. This is expected to generate tax revenue now, albeit at the expense of future tax revenue.

Tax credits: The expansions of the child tax credit, earned income credit, and college tuition credit have been extended for another year. The same is true of credits for R&D expenditures and renewable energy as well as an accelerated depreciation schedule for certain business expenditures.

Aside from the above, there were also some spending-related agreements. These included an extension of long-term unemployment benefits for 2013, the blockage of a reduction in Medicare payments to physicians, and a two month delay in the $109 billion in spending cuts due to “sequestration”.

This latter point sets up another showdown in late February that will likely coincide with the next rendition of the debt ceiling debate. Fun, fun, fun.

Update: As expected… After a long day of hand-wringing, the House ultimately passed the fiscal cliff legislation by a vote of 257-167.

1 TTMK January 1, 2013 at 5:21 pm

Nice summary. I’m not surprised this was agreed to in the final hours, it seemed like how things were destined to be.

Bigger picture, the debt ceiling issue looms – and this is where I’d like to see some more focus by the press. Hopefully, the average citizen out there will take this more seriously.

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