Breaking down the fiscal cliff deal

11:51 AM, Jan 3, 2013   |    comments
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GOLDEN VALLEY, Minn. - Members of Congress finally broke their stalemate to avert the fiscal cliff.

But the compromise bill, which blocked most impending tax increases and postponed spending cuts largely by raising taxes on upper-income Americans, left a lot of issues unresolved. It all but guaranteed continued budget clashes between parties.

Financial expert Dan Ament joined KARE 11 Sunrise, to talk about some highlights of the bill and the stock market's reaction.

The American Taxpayer Relief Act of 2012 - In summary, the bill will accomplish the following (summary of various provisions NOT intended to be a comprehensive list of all)

Individual Provisions
Marginal Rates: For joint filers earning less than $450k ($400k -single filers), income tax rates remain unchanged. For amounts above these thresholds -- the rate increases from 35% to 39.6%. These are permanent changes
Capital gains and dividends: For taxpayers above the $450k/$400k thresholds, the top tax rate on long-term capital gains and dividends would rise from 15% to 20% (BTW -- no changes to the treatment of carried interest). For taxpayers below these thresholds, the 15% rates remain. These are permanent changes.
Estate taxes: The estate and gift tax exemption threshold would remain at $5 million per individual (compared to the $3.5 million sought by the President). The tax rate increases from 35% to 40%. Also, reunification of the estate and gift tax remains. These are permanent changes.
AMT: The bill would retroactively adjust the AMT "patch" adjust the AMT threshold (the current fix expired at the beginning of 2012) to $78,750 (joint filers) and $50,600 (single filers) and provides for indexing going forward. Also allows nonrefundable personal credits against the AMT. This is a permanent change.
Education: With regard to education related provisions, the compromise would permanently: extend the expanded Coverdell Accounts contribution limits; the expanded exclusion for employer-provided educational assistance; expanded student loan interest deduction; the exclusion from income of amounts received under certain limited scholarship programs; extend the American Opportunity Tax Credit for 5 additional years. Above the line deduction for qualified tuition and related expenses - extend through 2013
PEP and Pease: With regard to the Personal Exemption Phaseout - the bill extends the repeal of PEP for taxpayers earning less than $250k (single) or $300k (joint filers). For individuals above those threshold amounts, the phaseout would return. With regard to PEASE (3% limitation on itemized deductions) - the limitation is repealed for taxpayers below the above thresholds ($250k (single)/$300k (joint), but for those above these income thresholds, the limitation would return. (a permanent change).
IRA to Charity Donations: Allows tax-free distributions from IRA's that are rolled directly to a charity -- extended through 2013.

Unemployment Compensation - extends for one year payments to unemployed workers who receive emergency federal unemployment benefits.

Payroll Taxes - The rate of workers' payroll taxes, which fund Social Security, has been 4.2% for the past two years. As of Jan. 1, it's back to 6.2%, on the first $113,700 in wages.

Roth Conversions - Allows any amount in a non-Roth account under a 401(k), 403(b), or 457(b) governmental plan, to be converted to a Roth account in the same retirement plan, regardless of whether the amount is distributable (e.g., you've reached age 59 1/2 or have separated from service with the employer).

Business > Bonus Depreciation (50%) - extend for qualifying property purchased and placed in service before 1/1/14.

Sequestration: Delayed for just two months ... The delayed $110 billion in spending cuts will kick in again.

The debt ceiling debate looms: At the same time, the U.S. will face the need to increase its borrowing limit. Expect another rancorous fight.

 

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