Congress and President
Obama reached a last-minute deal to head off the "fiscal cliff". Well, most of it anyway. Since the vote was so hurried, with lawmakers
who were not involved in the negotiation given less than ten minutes to
"read" the 154-page bill, a summary of the major items in the bill
and what isn't in the bill is in order.
payroll tax increase from 4.2 percent to 6.2 percent is the largest tax
increase in the bill, affecting almost all workers and business owners. This tax increase is projected to raise
revenues by more than $1.6 trillion over the next ten years, primarily from
bill kept in place all of the "evil" Bush-era tax policies for all
families with taxable income below $450,000 and single filers with taxable income
kept some of the tax credits from the 2009 expanded tax credits.
permanently patched the alternative minimum tax (AMT) to keep it from raising taxes
on middle-class families.
Congress made many of these changes permanent rather than holding them hostage
with another temporary fix, which has been the norm in Washington for the last
marginal rates increased from 35 percent to 39.6 percent. This is a massive 13.14 percent tax increase
on the top income earners, many of which are business owners.
bill raised effective marginal tax rates by reinstating the Personal Exemption
Phaseout (PEP) and the phase-down of itemized deductions (called the
"Pease" provision). Both
provisions begin at $250,000 for singles and $300,000 for families. These provisions have the effect of raising
tax liabilities without specifically raising the tax rates. When combined with the rate increase on top
income earners, these provisions compound the damage to work incentives and
funds availability for job creators.
tax rates on capital gains and dividends increase the tax bias against
investment. The fiscal cliff deal
allowed these tax rates to increase from 15 percent to 20 percent for families with
taxable income over $450,000 and singles with taxable income over
$400,000. Don't forget that ObamaCare
adds another 3.8 percent surtax on capital gains and dividends for families
with income over $250,000 and singles with income over $200,000. This sets a dangerous precedent, because it is
the first time a payroll tax applies to non-earned income. Increasing the rate from 15 percent to 23.8
percent is a huge 59 percent increase in the tax rate. This large of an increase will lower
investment across the economy. Less
investment will reduce capital formation for new and current businesses, with
the result that they will create fewer jobs and pay their current workers less.
fiscal cliff deal raises the tax rate from 35 percent to 40 percent while
leaving the exemption at $5 million ($10 million for married couples) and
allowing it to be indexed for inflation.
let the expensing of equipment expire.
This is a big increase in taxes on businesses that require regular equipment
purchases, and will also have a negative effect on job creation.
law delayed any decision on expense cutting for two months.
The tax laws in this
bill, when added to those items ObamaCare added, result in the biggest change
to the tax code since 2001. We will
discuss these changes in more detail in future blogs.
Like any good CPA, I need to add a disclaimer: Unfortunately, it is impossible to offer comprehensive tax info over the Internet, no matter how well-researched or written. And remember, I love my readers, but having me bookmarked on your computer doesn’t make you a client: Before relying on any information given on this site, contact a tax professional to discuss your particular situation.