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.
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”.
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.”
“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.”
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