In the United States, the fiscal cliff is a term used to describe the effect of a number of laws which if unchanged, could result in tax increases, spending cuts, and a corresponding reduction in the budget deficit which could significantly reduce economic growth beginning in 2013. These laws include tax increases due to the expiration of the so-called Bush tax cuts and across-the-board spending cuts under the Budget Control Act of 2011.
In regards to the tax increases, in past years, Congress has extended expiring provisions en masse in one legislative vehicle. In the 112th Congress, Members have yet to agree on legislation that would extend all of the provisions. Below is a list of some of the expiring provisions:
Several temporary tax (tax extenders) provisions affecting businesses either expired at the end of 2011 or are scheduled to expire at the end of 2012. Of these, the largest in terms of estimated tax reductions include:
- Bonus depreciation in 2011 and 2012, whereby a 100% bonus depreciation allowance was in effect through the end of 2011, set to decrease to 50% for 2012 and expire after 12/31/12
- Research and experimentation credit
- Enhanced cost-recovery for qualified leasehold, restaurant, and retail improvements;
- Enhanced Section 179 expensing allowances which allowed businesses to expense $500,000 for investment in qualified investment in 2011, $139,000 in 2012, and $25,000 thereafter
- 15-Year Straight-Line Cost Recovery for Qualified Leasehold, Restaurant, and Retail Improvements
- Work opportunity credit
- Special Rules for Qualified Small Business Stock
- Employer provided educational assistance
The payroll tax cut, which reduced an employee's share of Social Security taxes by two percentage points. The payroll tax cut, initially enacted for 2011 and extended for 2012 reduced the employee's share of Social Security payroll taxes, from 6.2% to 4.2% for employees and from 12.4% to 10.4% for the self-employed on the first $110,100 of wages in 2012.
Alternative Minimum Tax
The Alternative Minimum Tax (AMT) was designed to ensure that higher-income taxpayers who owed little or no taxes under the regular income tax because they could claim tax preferences would still pay some tax. The AMT patch, which, by increasing the amount of income that is exempt from the AMT and allowing certain personal credits against the AMT, prevents an estimated 26 million additional taxpayers from owing the AMT. In 2011, the AMT-exemption amounts were $74,450 for married individuals filing joint returns and $48,450 for unmarried individuals. These exemption amounts revert to $45,000 for married individuals and $33,750 for unmarried individuals in 2012.
Several temporary provisions (tax extenders) affecting individuals expired at the end of 2011 or are scheduled to expire at the end of 2012. Of these, the largest in terms of estimated tax reductions include:
- Reducing tax rates - results in a 3-5 percentage point increase in tax rates at most income level
- Reducing limits on personal exemptions - results in 2% reduction for each $2500 of AGI above threshold
- Reducing limits on itemized deductions to - results in 3% of AGI phase out
- Reducing limits on medical expenses - results in increase from 7.5% to 10% of AGI
- Deduction for state and local sales taxes
- Refund of credit for prior minimum tax liability
- Above-the-line deduction for qualified tuition and related expenses (upto $4000)
- Student loan interest deduction - payment after 60 mo., phase out at lower AGI levels
- Deduction of mortgage insurance premiums as qualified interest
- Increase of the child tax credit
- Increase of dependent care credit
- Reducing the marriage penalty - standard deduction for joint taxpayers currently at 200% the amount allowed for single taxpayers, will change to 167%
- Above-the-line deduction for certain expenses of elementary and secondary school teacher
- Capital Gains rates will generally change from the current maximum rate of 15% to 20%
- Qualified Dividends will be taxed at ordinary income rates rather than long term capital gains rates
New in 2013 - Obamacare/Affordable Care Act of 2010
There are several new tax provisions that take effect in 2013 as a result of the Affordable Care act of 2010
As we approach the fiscal cliff, it is unclear at this point whether congress will act to extend some or all of these expiring tax provisions. Congress may instead choose to allow all temporary provisions to expire. According to Congressional Budget Office ("CBO"), this will result in a considerable rise in revenue that will have a significant effect on reducing the projected future deficit. However, some economists warn that the scheduled expiration of these temporary provisions, which would occur simultaneously with the scheduled expiration of emergency unemployment insurance benefits and scheduled budget cuts under the Budget Control Act, would negatively impact real GDP growth. Finally, Congress may choose to balance the objectives of deficit reduction and economic assistance by extending certain provisions it determines are effective, while letting others expire.
Please contact us if you have questions concerning the 2013 federal tax law changes or any other tax compliance or planning issues.
Paul J. Beckert MBA, CPA
Pinnacle Business Solutions
Source: Congressional Research Service, Tax Policy Center, Internal Revenue Service