Fiscal Cliff Avoided—Sort Of

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Confused_guyCongress 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.

  • The
    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
    middle-class families.
  • The
    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
    below $400,000.
  • It
    kept some of the tax credits from the 2009 expanded tax credits.
  • It
    permanently patched the alternative minimum tax (AMT) to keep it from raising taxes
    on middle-class families.
  • Finally,
    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
    12 years.
  • Top
    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.
  • The
    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.
  • Higher
    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.
  • The
    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.
  • Congress
    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.
  • The
    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.