Wipfli Alerts & Updates: Congress Reaches “Fiscal Cliff” Deal! Yet Most Taxpayers Will Still Likely Pay Higher Taxes.


January 2, 2013
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The fiscal cliff did not last very long! Then again, it might have been merely delayed. Late last night, the House of Representatives passed the Senate’s version of the American Taxpayer Relief Act of 2012 (the deal). The Senate previously approved the bill, which deals with the expiration of the Bush Tax Cuts, among other provisions. President Obama is expected to sign the bill into law today.
 
Most provisions of the deal apply to 2013 and forward. However, please note that some provisions (e.g., IRA distributions to charity – see below) provide significant planning opportunities for 2012 yet and thus require immediate attention. This Alert highlights and discusses the deal’s major tax provisions that relate to our clients.
 
General commentary:
Although politicians, the media, and pundits may present the deal as a “solution” to the so-called fiscal cliff, it will do nothing to reduce the deficit (it actually increases it), and it only postpones urgent decisions related to federal spending and benefits. Moreover, several prominent tax provisions have been merely extended again, rather than permanently fixed.  In other words, the deal is far from a permanent solution, and taxpayers will continue to face uncertainty as politicians continue to debate the ongoing fiscal issues in the coming months and years.
 
Taxpayers must understand, regardless of media reports today, taxes will still increase for most taxpayers – immediately! For example, even if your income is under the $450k/$400k thresholds referenced below, you will experience an immediate increase in payroll and/or self-employment taxes. You may also experience an immediate increase in taxes on your net investment earnings and on your wages as a result of new taxes imposed by the 2010 Health Care Act. In addition, you may experience a tax increase by way of a reduction in your itemized deductions and/or personal exemptions. Most of our clients will still likely see a significant increase in their federal tax liability. Some may see increases as high as 10% to 20% over last year. Thus, while the deal extends or makes permanent many beneficial tax provisions, the discussion and uncertainty is far from over.
 
Summary of major tax provisions:

Marginal income tax rates: Existing Bush-era tax brackets have been extended permanently for families earning $450,000 or less and individuals earning $400,000 or less, annually. Taxpayers earning more than these thresholds will see a top marginal rate of 39.6% (up from 35%).

Investment tax rates: The maximum capital gains and qualified dividend rate will remain at 15% for those below the $450k/$400k income thresholds and will increase to 20% for those with incomes above the thresholds.

Alternative minimum tax (AMT): There is a permanent increase in the AMT exemption amount to $78,750 (up from $74,450 in 2011) for married individuals filing a joint return and to $50,600 for single taxpayers (up from $48,450 in 2011). The exemption amounts will be indexed for inflation in future years.

Estate, gift, and GST taxes: The current $5 million exemption per person is extended permanently, with a top rate of 40% (up from 35%, but down from the 55% rate that would have applied absent this deal). The estate, gift, and GST exemption amounts will remain unified. The exemption amount, which is indexed for inflation, was $5.12 million in 2012 and is estimated to be $5.25 million in 2013.

Selected extender provisions:

  • Business and other tax extenders are extended seamlessly through 2013. These provisions include the research credit, the active financing exception under Subpart F, and the CFC look-through rule.
  • Tax-free distributions directly from individual retirement plans for charitable purposes, which expired at the end of 2011, are now revived for 2012 and continued through 2013. Because 2012 has already passed, a special rule permits distributions taken in 2012 to be transferred to charities for a limited period in 2013. Another special rule permits certain distributions made in 2013 as deemed as having been made on December 31, 2012.
  • The 50% bonus depreciation provision is extended for one year.
  • PEP and Pease: The personal exemption phase-out (PEP) and overall limit of itemized deductions (Pease) are reinstated for families with incomes over $300,000 and individuals with incomes over $250,000. Note that this is an effective tax increase for those even under the $450k/$400k thresholds.
  • Other credits: The American Opportunity Tax Credit, the enhanced Child Tax Credit, and the enhanced Earned Income Tax Credit are extended for five years.

Other individual tax extenders and changes:

  • Deduction for certain expenses of elementary and secondary school teachers.
  • Exclusion from gross income of discharge of qualified principal residence indebtedness.
  • Parity for exclusion from income for employer-provided mass transit and parking benefits.
  • Mortgage insurance premiums treated as qualified residence interest.
  • Deduction of state and local general sales taxes.
  • Special rule for contributions of capital gain real property made for conservation purposes.
  • Above-the-line deduction for qualified tuition and related expenses.

Other business tax extenders and changes:

  • Extension and modification of bonus depreciation.
  • Increased expensing limitations and treatment of certain real property as Section 179 property.
  • Extension and modification of research credit.
  • Reduction in S-corporation recognition period for built-in gains tax.
  • 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
  • Temporary exclusion of 100% of gain on certain small business stock.
  • Basis adjustment to stock of S-corporations making charitable contributions of property.
  • Work opportunity tax credit.
  • Enhanced charitable deduction for contributions of food inventory.
  • Employer wage credit for employees who are active-duty members of the uniformed services.
  • New markets tax credit.
  • Housing allowance exclusion for determining area median gross income for qualified residential rental project exempt facility bonds.
  • Qualified zone academy bonds.
  • Temporary minimum low-income tax credit rate for non-federally subsidized new buildings.
  • Seven-year recovery period for motorsports entertainment complexes.
  • Accelerated depreciation for business property on an Indian reservation.
  • Modification of tax treatment of certain payments to controlling exempt organizations.
  • Treatment of certain dividends of regulated investment companies.
  • RIC qualified investment entity treatment under FIRPTA.
  • Subpart F exception for active financing income.
  • Look-through treatment of payments between related controlled foreign corporations under foreign personal holding company rules.
  • Special expensing rules for certain film and television productions.
  • Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.
  • Indian employment tax credit.
  • Railroad track maintenance credit.
  • Mine rescue team training credit.
  • Election to expense mine safety equipment.
  • Empowerment zone tax incentives.
  • Tax-exempt financing for New York Liberty Zone.
  • Temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands.
  • Modification and American Samoa economic development credit.

Energy tax extenders:

  • Credit for energy-efficient existing homes.
  • Credit for energy-efficient new homes.
  • Credit for energy-efficient appliances.
  • Credit for alternative fuel vehicle refueling property.
  • Alternative fuels excise tax credits.
  • Credit for two- or three-wheeled plug-in electric vehicles.
  • Extension and modification of cellulosic biofuel producer credit.
  • Incentives for biodiesel and renewable diesel.
  • Production credit for Indian coal facilities placed in service before 2009.
  • Extension and modification of credits with respect to facilities producing energy from certain renewable resources.
  • Extension and modification of special allowance for cellulosic biofuel plant property.
  • Special rule for sales or dispositions to implement FERC or state electric restructuring policy for qualified electric utilities.

As previously mentioned, this Alert highlights and discusses the deal’s major tax provisions that relate to our clients. If you have questions about how this impacts your specific tax situation, please contact Rick Taylor, Ryan Laughlin, or your Wipfli relationship executive.


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