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What the Fiscal Cliff Compromise Means for All of Us

As we all know by now, the feared “fiscal cliff” was averted at the eleventh hour. After tense and exhaustive negotiations that kept the country on edge, the Senate approved a bill to avert the fiscal cliff two hours after the midnight deadline on January 1, 2013, and the House of Representatives voted to approve the Senate bill one day later on January 2, 2013.

The impact of the approved bill known as the American Taxpayer Relief Act of 2012 (the “Act”) will be significant for many individuals and business entities alike. Therefore, it is critical to assess whether adjustments should be made in one’s future personal and business arrangements that reflect the changes introduced by the fiscal cliff deal.

According to various estimates, the Act is projected to raise approximately $600 billion in new revenues over the next ten years. According to an IRS Newswire released on January 11, 2013 (IR-2013-4), beginning in tax year 2013, some of the tax items of greatest interest to most taxpayers include the following:

  • The Bush tax cuts for individuals earning less than $400,000 per year and married couples that file jointly and earn less than $450,000 remain in place so that the marginal rates — 10, 15, 25, 28, 33 and 35 percent — remain the same as in prior years;
  • A new tax rate of 39.6% is added for individuals whose income exceeds $400,000 and for married couples who file jointly and earn more than $450,000;
  • The standard deduction is increased to $6,100 for individuals, and $12,200 for married couples filing jointly;
  • The maximum Earned Income Credit amount is increased from $5,891 to $6,044 for taxpayers filing jointly who have three or more qualifying children;
  • Unemployment insurance is extended for a year and a series of automatic cuts in federal spending is delayed for another two months;
  • The personal exemption is increased from $3,800 to $3,900. However, beginning in 2013, the exemption is subject to a phase-out for individuals that have adjusted gross incomes of $250,000 and married couples that file joint tax returns and have an gross adjusted income of $300,000; and
  • The basic exclusion for estates of decedents who die during 2013 is increased to $5,250,000, up from a total of $5,120,000 for estates of decedents who died in 2012. However, the Act increases the maximum estate tax rate to 40% for estates that exceed the exclusion.

While the Act saves millions of middle-class taxpayers from certain tax increases, they will still feel the pinch in their paychecks because payroll taxes are still set to increase. The government had temporarily lowered the payroll tax rate in 2011 from 6.2% to 4.2% for employees. That adjustment, which has cost about $120 billion a year, expired on December 31, 2012, and was not extended as part of the fiscal cliff compromise.

Although the Act does offer some certitude for now, there are still a number of thorny issues that have been put off until March, when Congress will have additional issues to tackle. Significantly, the $16.4 trillion debt ceiling that the United States is now facing has not been resolved, and the cuts in federal spending that would have taken effect and reduced the budgets of many federal agencies and programs by 8% to 10% have been put off.

If Twomey Latham can be of any assistance to you on this or any other matter, please do not hesitate to give us a call.