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The American Taxpayer Relief Act of 2012 fiscal cliff disaster averted

Thursday, January 03, 2013
Opalesque Industry Update: After furious round-the-clock year end negotiations, lawmakers determined to act before the U.S. stock markets opened after the New Year’s holiday, passed the American Taxpayer Relief Act of 2012 (the Act). This legislation, which President Obama promised to sign, averts the dire consequences from the so-called “fiscal cliff” of expiring Bush-era tax cuts and the imposition of spending cuts enacted within other legislation.

The uncertainty of the tax law impeded the long-term tax and cash flow planning for businesses and prevented taxpayers from making informed decisions. With some modifications, the Act extends the Bush-era tax cuts for individuals earning under $400,000 annually and $450,000 for couples, sets the estate tax rate at 40 percent, with an exemption for estates valued under $5 million, provides a permanent patch for the alternative minimum tax (AMT), and taxes dividends and capital gains at 20 percent for individuals earning over $400,000 and couples with income over $450,000.

In addition, the Act extends the Research and Experimentation credit through 2013 and makes permanent certain personal tax credits, such as the child care and college tuition credit and also The Earned Income Tax Credit is extended for five years. The legislation also extends long-term unemployment insurance benefits through 2013, providing a much needed lifeline to about 2 million unemployed Americans.

While many tax provisions were addressed, the Act does not fully resolve the nontax portion of the fiscal cliff regarding automatic spending cuts (“sequestration”) which are now deferred for the next two months. Discussions regarding the growth of the national debt are expected to begin again when the new Congress is sworn in during January. Taxes are likely to continue to be part of the negotiations concerning the national debt over the next few months. While this Act is projected to raise $620 billion over the next ten years, lawmakers are looking for cuts to entitlements to generate $1 trillion in new revenue.

Highlights of the major provisions of the Act include:

  • Make the 2001 and 2003 tax cuts permanent for income under $400,000 (single) and $450,000 (joint),
  • Return the top rates to 39.6% for ordinary income and 20% for capital gains and dividends (not including the new 3.8% Medicare tax),
  • Reinstate the phaseouts for personal exemptions and itemized deductions at income levels of $250,000 (single) and $300,000 (joint),
  • Make the $5 million estate and gift tax exemption permanent (indexed for inflation) but raise the rate from 35% to 40%,
  • Permanently index the alternative minimum tax (AMT) for inflation,
  • Retroactively extend tax provisions such as the research credit,
  • Provides 50% bonus depreciation for qualified property placed in service,
  • The Act does not extend the 2% point cut in payroll and self employment taxes and,
  • It does not repeal any newly effective Medicare taxes.

Marcum

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