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What the ‘fiscal cliff’ deal means for you

Jul 09, 2014

The approval of the American Taxpayer Relief Act of 2012 (otherwise known as the “fiscal cliff deal”) in the wee hours of Jan. 1 signaled to the American people that Congress can, indeed, get something done, albeit with much drama and brinksmanship.

The legislation preserves and makes permanent many Bush-era tax breaks for the middle class, revives other tax breaks that had previously expired and, most notably, raises income taxes for higher-income Americans.

Some of the tax breaks are retroactive to 2012, and a few require taxpayers to act within the next month in order to take advantage of them.

Following is a summary of the major provisions of the legislation, broken down by those that affect individuals and those that impact business.

As always, we are here to help. If you have questions about how the provisions of the American Taxpayer Relief Act affect you or your business, please give us a call at 617-696-8900, or send us an email.

Impact on Individuals

IRA distributions to charity
The legislation extends for two years (through Dec. 31, 2013) the provision allowing tax-free distributions from individual retirement accounts to charities by individuals age 70½ or older, up to $100,000 per taxpayer per year.
Taxpayers who make such charitable distributions in January 2013 may recharacterize them as being made on Dec. 31, 2012, in order to qualify for the 2012 tax year. The legislation also permits taxpayers who received distributions from their IRAs in December 2012 to treat them as charitable distributions, as long as the funds are transferred to a qualified charity before Feb. 1, 2013.

AMT Patch
One of the most notable provisions of the legislation is a permanent “patch” applied to the Alternative Minimum Tax that is retroactive to the 2012 tax year and will be adjusted for inflation henceforth. It increases exemption amounts for 2012 to $50,600 for unmarried individuals; $78,750 for married taxpayers filing jointly and surviving spouses, and $39,375 for married taxpayers filing separately. These exemptions are projected to be approximately 2.5% higher for the 2013 tax year.

Extension of individual provisions 
The act also extended through 2013 certain temporary individual tax provisions, most of which expired at the end of 2011:

  • 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

Individual tax rates
All the Bush-era individual marginal tax rates (10%, 15%, 25%, 28%, 33%, and 35%) are made permanent. A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).

Phaseout of itemized deductions and personal exemptions
The personal exemptions and itemized deductions phaseout is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly. 

Capital gains and dividends
A new 20% tax rate applies to capital gains and dividends for individuals above the top income tax bracket threshold ($400,000 for single filers, $450,000 for joint filers and $425,000 for heads of households). The 15% rate is retained for taxpayers in the middle brackets, and the zero rate is retained for taxpayers in the 10% and 15% brackets.

Estate and gift tax
The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective in the 2013 tax year. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent. 

Permanent extensions
Various temporary tax provisions were made permanent. These include:

  • Marriage penalty relief (i.e., the increased size of the 15% rate bracket and increased standard deduction for married taxpayers filing jointly);
  • The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one);
  • Expanded adoption credit and adoption-assistance program amounts;
  • The exclusion for National Health Services Corps and Armed Forces Health Professions Scholarships;
  • The exclusion for employer-provided educational assistance;
  • The enhanced rules for student loan deductions;
  • The higher contribution amount and other changes to Coverdell education savings accounts;
  • The employer-provided child care credit;
  • Special treatment of tax-exempt bonds for education facilities;
  • Repeal of the collapsible corporation rules;
  • Special rates for accumulated earnings tax and personal holding company tax

Individual credits extended
The American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2017. 
Other credits and items from the American Recovery and Reinvestment Act of 2009 that were extended for the same five-year period include:

  • Enhanced provisions of the child tax credit
  • Earned income tax credit

Impact on Business
The act also extended many business tax credits and other provisions. Notably, it extended through 2013 and modified the Sec. 41 credit for increasing research and development activities, which expired at the end of 2011. The credit is modified to allow partial inclusion in qualified research expenses and gross receipts those of an acquired trade or business or major portion of one. The increased expensing amounts under Sec. 179 are extended through 2013. The availability of an additional 50% first-year bonus depreciation was also extended for one year by the act. It now generally applies to property placed in service before Jan. 1, 2014 (Jan. 1, 2015, for certain property with longer production periods).
Other selected business provisions extended through 2013, and in some cases modified, include:

  • Temporary minimum low-income tax credit rate for non-federally subsidized new buildings
  • New markets tax credit
  • Employer wage credit for employees who are active duty members of the uniformed services
  • Work opportunity tax credit
  • 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  
  • Reduction in S corporation recognition period for built-in gains tax

Energy Tax Extenders for Businesses and Individuals
The act also extends through 2013, and in some cases modifies, a number of energy credits and provisions that expired at the end of 2011:

  • Credit for energy-efficient existing homes
  • Credit for alternative fuel vehicle refueling property
  • Credit for two- or three-wheeled plug-in electric vehicles
  • Incentives for biodiesel and renewable diesel
  • Cellulosic biofuel producer credit
  • Credits with respect to facilities producing energy from certain renewable resources
  • Credit for energy-efficient new homes
  • Credit for energy-efficient appliances
  • Special allowance for cellulosic biofuel plant property
  • Special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy for qualified electric utilities
  • Alternative fuels excise tax credits

Foreign Provisions 
The IRS’s authority to apply a withholding tax to gains on the disposition of U.S. real property interests by partnerships, trusts, or estates that are passed through to partners or beneficiaries that are foreign persons is made permanent, and the amount is increased to 20%.

New Taxes in 2013 Related to Health Care Reform

In addition to the various provisions discussed above,  [Health Care Reform 2013] some new taxes also took effect Jan. 1 as a result of 2010’s health care reform legislation.

  • Additional hospital insurance tax on high-income taxpayers. The employee portion of the hospital insurance tax part of FICA, normally 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case. For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount. 
  • Medicare tax on investment income. Starting Jan. 1, a tax is imposed on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income (AGI) exceeds a threshold amount. For estates and trusts, the tax equals 3.8% of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins. For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000; for married taxpayers filing separately, it is $125,000; and for other individuals it is $200,000. Net investment income means investment income reduced by deductions. Investment income includes income from interest, dividends, annuities, royalties, and rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business. However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income.
  • Medical care itemized deduction threshold. The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.
  • Health flexible spending arrangement. Effective for cafeteria plan years beginning after Dec. 31, 2012, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement for any plan year is $2,500. 

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