President Obama signed into law the American Taxpayer Relief Act (H.R. 8)
late Jan. 2, permanently extending the 2001 and 2003 tax cuts for individuals
earning up to $400,000 and postponing automatic, across-the-board spending cuts
for two months.
The Act also permanently indexes the alternative minimum tax exemption amount
to inflation, extends emergency unemployment benefits for one year, and
continues current Medicare payment rates to doctors for one year.
With the prospect of a spike in milk prices also coming in 2013 because of a
scheduled jump in federal subsidies to dairy producers, lawmakers opted to
include an extension of farm bill policies and programs through the end of the
fiscal year. The Act was the result of last-minute negotiations between Vice
President Joe Biden and Senate Minority Leader Mitch McConnell (R-Ky.) to avoid
the fiscal cliff.
Other major changes included permanently raising the top capital gains and
dividends tax rates to 20% on household income in excess of $450,000, while
keeping the 15% rate intact for those earning less.
On top of those provisions, the Act also sets the estate and gift tax rate at
40%--up from 35% in 2012--and permanently indexed the $5.12 million per person
exemption level to inflation.
Estate tax advisers and attorneys issued a collective sigh of relief Jan. 2
in reaction to the passage of the provisions.
“The two big things that people were worried about did not come to pass,”
Beth Kaufman, an attorney with Caplin & Drysdale, told BNA Jan. 2. The
estate and gift taxes remain unified, and because the exemption level is not
going down, clawback has ceased to be an issue.
For 2013, according to IRS inflation factors, the exemption is estimated to
be $5.25 million, according to Richard Behrendt, senior vice president with
Baird in Milwaukee. If inflation were to rise to 3%, the exemption could become
almost $6.5 million by 2020, said Behrendt. Inflation is currently 1.8%.
All the provisions from 2012 were extended with the exception of the rates,
which means portability of the estate tax and gift tax was also extended. Under
the portability rules, a spouse is allowed to use the unused estate and gift tax
exemption amounts of a deceased spouse.
Perhaps the biggest windfall was the permanency of the provisions. A
permanent estate tax has been lacking for more than a decade so the fact that
wealth planners will now know what they are dealing with from year to year is
the biggest bonus, most said.
There is also no restriction on grantor retained annuity trusts or the use of
The big bonanza in gift-giving most likely occurred in 2012, as affluent
taxpayers rushed to take advantage of what they thought would be a fleeting $1
million gift exemption, Kaufman said. But there are still good reasons to make
gifts. Not everyone got it done in 2012, and there is always the lure of getting
the future appreciation of the assets out of the estate.
A separate provision would curb the impact of the reinstatement of the
personal exemption phase-out and the limitation on itemized deductions under the
Pease limitation, named after former Rep. Donald Pease (D-Ohio). The phase-out
and limitation will begin at $250,000 for individuals and $300,000 for joint
Short-term changes in the law include an extension of $76 billion in
temporary tax incentives through 2013. The package includes many popular tax
provisions, such as the research and development tax credit, the tax deduction
for state and local sales taxes, and an above-the-line deduction of up to $250
for teachers using their own money to buy classroom supplies.
With a new 3.8% surtax on investment income becoming effective in 2013 for
individual income in excess of $200,000 ($250,000 for joint filers), there will
now be three different thresholds at which high-income households could be
impacted by tax increases.
In a report
outlining the changes to the law, Deloitte Tax said the legislation reduces some
of the uncertainty about future tax rates, but in some ways the changes can be
seen as adding complexity to the tax code.
Deloitte noted that long-term capital gains from the sale of a typical
appreciated stock will now potentially be subject to four different tax rates,
ranging from zero to 23.8% with the inclusion of the new surtax.
“This range of tax rates does not take into consideration other types of
capital gains transactions that have unique rates, for example, unrecaptured
[tax code] §1250 gain and collectibles taxed at 25% and 28%, respectively. It is
little better for ordinary income,” the Deloitte report said.
In addition, Deloitte reminded its clients that individuals with income in
excess of $400,000 will face the new 39.6% tax bracket, but those earning from
$200,000 ($250,000 for couples) to $400,000 would still need to take into
account the additional 0.9% Medicare Hospital Insurance tax that was put into
law under the Affordable Care Act and also goes into effect in 2013.
“And of course for both ordinary and investment income there will be the
application of 'stacking rules' to determine which income is taxed at the lower
rates and which at the higher. Thus, while taxpayers may cheer the fact the Act
makes permanent many unsettled areas of law, the added complexity it creates
will no doubt also drive calls for Congress to consider fundamental tax reform
sooner rather than later,” the report said.
Congress extended indefinitely several tax provisions impacting
employer-provided fringe benefits, including adoption assistance and education
The Act also reestablished parity between mass transit and parking fringe
benefits, extending the parity until Jan. 1, 2014, according to the Act. The
provision applies to months after Dec. 31, 2011, the Act said.
A special rule that would expand eligibility for in-plan Roth transfers
caught benefit practitioners by surprise when they learned it was included in
legislation addressing the fiscal cliff, but some practitioners said the tax
provision would improve existing retirement policy.
“It was a bit of a surprise, but at the same time, it's good policy,” David
C. John, senior research fellow in retirement security and financial
institutions at the Heritage Foundation, told BNA Jan. 2.
If individuals decide “that it's to their benefit to switch to a Roth
[account] within a plan, this enables them to do it, and they don't have to wait
for a specific instance or an artificial age limitation,” he said.
The Act amends §402A(c)(4) by adding a special rule for Roth transfers. The
new rule permits more participants in qualified retirement plans with in-plan
Roth conversion features to transfer amounts to Roth accounts.
The special Roth rule in the fiscal cliff legislation would generate an
estimated $12.2 billion within a 10-year budget window.
“It's small potatoes in terms of its [revenue] impact, but the fact that
things can be done so cavalierly with the retirement system, which really
deserves more serious attention than it gets, is sort of discouraging,” Alicia
H. Munnell, director of the Center for Retirement Research and professor of
management sciences at Boston College, told BNA Jan. 2.
“I don't think anybody cared whether it was good benefit policy or not,”
Munnell added. “I'm for making things easy and automatic, so giving people one
more option is not necessarily helpful,” she said.
The legislation also extends the wind production tax credit and several other
energy-related tax incentives for alternative power, biofuels, and energy
The American Taxpayer Relief Act includes more than $18.1 billion to extend
existing energy tax incentives over a 10-year period. The largest item,
estimated to cost $12.2 billion, would be an extension of a production tax
credit for wind and other forms of renewable energy, according to Joint
Committee on Taxation estimates.
The modification to the wind production tax credit, which was included in a
tax extenders bill (S. 3521) approved by the Senate Finance Committee in August,
establishes a “de facto extension” lasting two-and-a-half years or more,
according to a research note published Jan. 2 by ClearView Energy Partners, a
However, ClearView said “the generous expansion of the PTC could represent a
'sunset' ” for the tax credit as Congress considers future tax reform, despite a
proposal by the wind energy industry to phase the credit out over a six-year
The American Wind Energy Association, the industry's main trade group, hailed
the extension of the PTC, saying in a Jan. 1 statement it would save as many as
37,000 jobs in the wind industry and revive business at nearly 500 manufacturing
facilities across the country.
By Brett Ferguson and Cheryl Bolen
The Deloitte Tax report, Swerving from the cliff: Tax provisions in the
American Taxpayer Relief Act of 2012, is at http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/Tax/us_tax_swerving_from_the_cliff_010213.pdf.
For an analysis of the American Taxpayer Relief Act by the Tax Management
staff, see the Tax Legislation section of this issue.