Congress pulls back from the fiscal cliff − for the time being
Article prepared by and republished courtesy of Evan Migdail of DLA Piper; originally published here http://www.dlapiper.com/congress-pulls-back-from-the-fiscal-cliff/.
Following an unprecedented New Year's session, Congress has passed legislation, the Taxpayer Relief Act of 2012, negotiated with President Barack Obama to partially prevent the US economy from going over the fiscal cliff. You may read the full text of the bill here.
At a cost of US$4 trillion over ten years, the main provisions are as follows:
The 2001 individual tax rates are made permanent, except that the highest rate, 39.6 percent, starts at US$450,000 in taxable income for married filing jointly, US$400,000 for individuals.
Tax rates of capital gains and dividends are set permanently at 15 percent, and 20 percent for those above the thresholds at which the individual 39.6 percent rates start.
The estate tax rate goes up to 40 percent with a US$5 million exemption (US$10 million for married couples).
The limitations on itemized deductions and personal exemptions phaseout for high earners are restored at US$250,000 for individuals and US $300,000 for married filing jointly.
The alternative minimum tax "patch" to keep middle class taxpayers from paying the AMT is enacted permanently (previously the patch had to be renewed yearly).
The Senate Finance Committee package extending most expired and expiring provisions through the end of 2013 is adopted as part of the bill.
Bonus depreciation at 50 percent is extended at 50 percent.
The payroll tax cut enacted in 2010 is allowed to expire, but long-term unemployment benefits are extended for a year.
The most important features of the compromise may relate to what is not in the bill, rather than what is enacted: i.e., business tax reform, entitlement reform and raising the debt ceiling. Many Republican members preferred to address all of the tax provisions (individual and corporate) together as part of comprehensive tax reform.
The decision to go ahead with this compromise is premised on an assumption that tax reform affecting every business will be a priority in the new Congress and that every tax expenditure will be subject to extreme review and could be sacrificed or revised in order to achieve lower corporate and individual rates. For many of the members who voted for this bill, this will be last time they simply extend current tax policy; the next step will be fundamental tax reform.
The compromise does not contain an increase in the debt ceiling − the amount the US is permitted to borrow, now set at US$16.4 trillion. Treasury Secretary Timothy Geithner reported to Congress that the debt ceiling was reached on December 31 and that he can avoid default for no more than eight weeks by federal account managements techniques. As a result, the President and Congress are likely to be engaged in fiscal cliff negotiations almost as soon as the new Congress comes into session on January 3.
The coming months could see the most comprehensive reexamination of the Internal Revenue Code in almost 30 years, with every aspect of federal taxation under review. We are eager to keep you up to date and these matters develop and help you protect your interests as tax reform gets underway.
To learn more about these matters and the coming reexamination of the Internal Revenue Code, please contact Evan Migdail.