News & Events Listings

By enacting the American Taxpayer Relief Act of 2012, Congress managed to avert, at the last minute, the "Fiscal Cliff". Unfortunately, this legislation left many issues unresolved. Congressional Republicans did not get the spending cuts they wanted, and soon the nation will be faced with being unable to continue to borrow more money to pay for the cost of government (the "debt ceiling" issue). Accordingly, this issue will pay special attention to where we go now as a nation in addressing our mounting budgetary deficits.

  1. Congress's Last Minute Passage of Legislation Averts Income Tax Hikes for Many - On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 ("ATRA") which allowed income tax rates to rise on the nation's highest earners, while extending many tax cuts for individuals and businesses.

    Regarding the federal income tax, perhaps ATRA's most significant impact was to permanently maintain the reduced 2001 and 2003 federal income tax rates for individuals earning up to $400,000 ($450,000 for married filing jointly couples), while allowing income above that to be taxed at rates rising to 39.6%.

    Regarding federal estate taxes, ATRA made permanent the current $5,000,000 per person exemption, as indexed for inflation ($5,250,000 for 2013), but raised the top tax rate from 35% to 40%. In addition, ATRA also made permanent the "portability provision" that allows a spouse to transfer his or her estate tax exemption to a surviving spouse.

    The following summarizes some of the more important provisions of the ATRA:

    Permanent AMT Patch
    Nearly half - $1.8 trillion - of the estimated $3.9 trillion cost of the legislation was due to making permanent a patch that has the effect of keeping the alternative minimum tax from impacting almost 4,000,000 taxpayers in 2012.

    Tax Extenders for Individuals
    The ATRA includes $12 billion in tax breaks for individuals. These include the deduction for state and local sales taxes and the above-the-line deduction of up to $250 to teacher classroom expenses. Also extended was a tax provision that allows taxpayers to exclude (under certain conditions) up to $2 million of mortgage debt forgiven by the lender. The ATRA also now permits plan sponsors to allow participants in 401(k) plans to convert some or all of their 401(k) account to a Roth IRA account at any time. Under prior law, participants must have been otherwise entitled to a distribution under the 401(k) plan in order to make this conversion.

    Tax Extenders for Businesses
    The ATRA includes more than $46 billion in traditional tax extenders that business interests have been lobbying for, including an extension of the research and development tax credit, the Work Opportunity Tax Credit, and the 15-year straight line cost recovery for qualified leasehold, restaurant, and retail improvements.

    Many Below the $400,000 Threshold Will Nevertheless Experience An Increase In Their Payroll Taxes

    In addition to tax rate increases on “wealthy” wage earners, the ATRA will nevertheless result in an increase in the payroll taxes incurred by approximately 77% of all households. This tax increase occurred since the ATRA did not extend the 2% payroll tax holiday that expired on December 31, 2012. An employee's share of the Social Security Taxes withheld from his salary therefore has increased to 6.2% of his wages for 2013 (from 4.2% of his wages in 2012).

    Tax Reform Still the Goal

    The Congressional tax writers who drafted the ATRA have stated that although the ATRA makes permanent the Bush-era tax cuts for those earning less than $400,000 per year, they are still working on overhauling the Internal Revenue Code. Prior to the passage of the ATRA, the House of Representatives Ways and Means Committee Chairman, Representative Dave Camp, (R-Mich.), remarked that the Internal Revenue Code was a “nightmare” and that Congress needs to make it simpler and fairer for families and small businesses. He also emphasized that “We can and will do comprehensive tax reform this year, in 2013”.

  2. President Obama and Representative John Boehner (R-Ohio) Square Off – Upon the passage of the ATRA legislation, the President took the occasion to announce his game plan for the next set of negotiations that must take place over the next 2 months.

    President Obama noted that “there will be more deficit reduction as Congress decides what to do about the automatic spending cuts [initially required under the Budget Control Act of 2011 - i.e., sequestration] that we have now delayed for 2 months [via the ATRA].” He went on to say that “we can't simply cut our way to prosperity. Cutting spending has to go hand in hand with further reforms to our tax code, so that the wealthiest corporations and individuals can't take advantage of loopholes and deductions that aren't available to most Americans.”

    At his January 14, 2013 news conference, President Obama said that deficit reduction cannot be achieved only through sending cuts, and that he will not cut spending dollar-for-dollar to increase the debt ceiling.

    In contrast, Rep. Boehner stated that the federal government has a spending problem that has led to a $16 trillion national debt that threatens the nation's future. In Rep. Boehner's words, “Now the focus turns to spending. The elected Republican majority in the House will in 2013 hold the President accountable for the balanced approach he promised, meaning significant spending cuts and reforms to the entitlement programs that are driving the country deeper into debt.”

    Boehner insisted that spending cuts are the solution to the nation's deficit crisis. According to him, “[The] consequences of failing to increase the debt ceiling are real, but so too are the consequences of allowing our spending problem to go unresolved.”

  3. Congressional Research Service ("CRS") Weighs In on the ATRA - In a report released on January 9, 2013, the CRS took the position that although the ATRA was meant to avoid the mandated tax increases and spending cuts known as the "Fiscal Cliff", it only reduced its impact. The report noted that its remaining effect could decrease economic output by as much as 2% (if additional action by Congress is not taken). According to the CRS, the issues involved in the ATRA addressed approximately 60% of the Fiscal Cliff, but only avoided 40% of the projected economic contraction had the ATRA not been enacted. In its report, the CRS stated:

    “Many of the items omitted in the legislation had a more powerful than average effect on the economy per dollar of deficit, especially the [failure to address the] payroll tax cut and budget cuts. Even though much of the contractionary effect has been eliminated, the economy will still slow due to fiscal restraint.”

  4. Democrats Are Not In a Hurry to Enact Fundamental Tax Reform - In a statement released on January 15, 2013, Representative Sander Levin (D-Mich.) stated that "[We] aren't going to accomplish tax reform in the next six weeks." According to Rep. Levin, Congress must first deal with the spending cuts known as the "sequester" (the automatic deep spending cuts in defense and other programs which were set to occur on January 1, 2013 under the Budget Act of 2011, but which were postponed for two months under the ATRA). Noting there will be plenty of time to then deal with tax reform, Rep. Levin said that he is hopeful, but not confident, that Congress will accomplish tax reform in 2013. Rep. Levin was more optimistic, however, about Congress' being able to avoid sequester and being able to raise the debt ceiling. According to Rep. Levin, the risk of a further downgrade in the United States' credit rating should be a strong enough consequence to spur Congress to action.
  5. IRS Reminds IRA Owners Of Pending Deadline to Make "Qualified Charitable Distributions" For Their 2012 Tax Year - In IR 2013-6, the IRS has issued a reminder to taxpayers that, as a result of changes made by the ATRA, IRA owners who are age 70 1/2 and older have until January 31, 2013 to make tax-free transfers from their IRA to eligible charities and treat those transfers as if they were made in 2012. These distributions will be treated as "Qualified Charitable Distributions" ("QCD") under IRC Section 408(d). Additionally, eligible IRA owners who received a distribution in December of 2012, but have not yet transferred the distribution to a qualified charity can still transfer any portion of that distribution to the charity by January 31, 2013 and treat the transfer as a 2012 QCD. These special rules result from the ATRA retroactively reinstating the QCD provisions of IRC Section 408(d) for all of 2012 and extending them through December 31, 2013.

For additional information regarding this topic, please contact your local UHY LLP professional.