The following is a cheat sheet on the Fiscal Cliff Avoidance – aka American Taxpayer Relief Act of 2012. While HR 8 began as a Republican election bill for Romney, including some language that would never have passed, it was gutted and revised to reflect the compromise. Over the next few weeks, the political discussion will be by both parties claiming a victory, but the reality is in the numbers:
- Estate Taxes. The final deal raises the tax to 40% from 35% on estates over $10 million. (That figure is for couples, whose estates are each entitled to a $5-million exemption upon their deaths.) There is no expiration date set at this point, to my knowledge.
- Income Tax Brackets. The return of the 39.6% rate is back for single over $400K, head of household over $425K and married filing joint over $450K, annual indexing based on 2012, rather than 1992. Otherwise, Bush Tax Cuts apply on ordinary income. But, the 2% FICA payroll deduction ends. There is no expiration point to my knowledge.
- Itemized Deductions. But, itemized deduction phase-outs are back. Beginning at MAGI of $250K; $275K and $300K (married/joint) (2012-indexed). There is no expiration of this deal.
- Capital Gains Rates. Capital gains are 15% or 20%, depending on the same magic numbers. There is no expiration of this deal.
- PCH/AET. PHC and Accumulated earnings taxes are at 20%. No breaks there.
- Education Credits. Education Credits are extended to 2018.
- Child/EITC Refund. Child and earned income tax credit refunds are extended to 2018.
- AMT Exclusion. This is a biggie. The AMT Exclusion Amount is now permanently set and indexed based on 2011-year indexing. So, for 2012, the exclusion amount is 78,750 or 50,600, depending on filing status.
- Home indebtedness. A one year extension is granted for the QPRI exclusion. For Sellers who are upside down on their mortgage, Borrowers will still be able to arrange a “short sale,” or a principal reduction modification on qualified principal residence indebtedness when the lender agrees to accept less than the full balance due on the mortgage, without having to treat the forgiven debt as taxable income.
- School Teachers. Their supplies are deductible again – last year and 2013.
- Other Extenders. A lot of the provisions that expired in 2011 are extended for 2012 and 2013. This includes the deduction for sales taxes, the above-the-line deduction for qualified tuition, the expansion of mortgage interest to include mortgage insurance premiums, the IRS-to-charity distribution exclusion, the real estate conservation easement capital gain provision,
- Business Incentives. A lot of the business incentives, such as the R&D credit, including specialized ones, were extended.
- S Corporations. One broad one is personally exciting – for 2012 and 2013, an S Corp with built-in gain will be subject to a reduced built-in gain 5-year holding rule. For example, if a corporation elected S status in January 1, 2008, it has reached 5 years and a liquidation would not trigger built-in gain tax. I’ve been watching this one for trapped real estate in corporations, wherein after distributing corporate E&P, we’ve elected S Corp status. The “sweat out” period was 10 years, 5 years means some clients (with inherited corporate owned real estate) may now decide to liquidate and convert into an LLC, due to the low real estate values.
- Bonus Deprecation. 50% Bonus Depreciation is extended 1 year.
- Energy Incentives. Energy incentives were also extended.
The reality of this bill is that the effect on slowing down the increase in the US deficit will be minimal (or nonexistent). Congress will face a $16.4 trillion federal borrowing limit in only a little over 30 days, wherein both taxes and government spending will become an issue again.