A month ago I wrote an article about the potential tax and budget consequences of our government going over the fiscal cliff. Although technically we went off the fiscal cliff, Congress did pass legislation that addressed many of the tax increases linked to the expiration of the Bush tax cuts. Congress delayed by two months the sequestration cuts and discussions of increasing our debt limit.
The bill was called the American Tax Relief Act of 2012. The following is a very brief overview of some of its components:
- Marginal rates: The bill extends the 10, 25, 28 and 33 percent rates on income at or below $400,000 (individual filers), $425,000 (heads of households) and $450,000 (married filing jointly) for taxable years beginning after Dec. 31, 2012. This is significant for most investors.
- Capital gains and dividends: The bill extends the current 15 percent top capital gains and dividends rate for those making up to $400k (singles), $450k (married). The tax rate is 20 percent for capital gains and dividends on income above that threshold. For those whose income is below the 25 percent marginal tax rate; there will be no tax on capital gains or dividends.
- Dependent care credit: The bill permanently extends the expanded dependent care credit, which allows a taxpayer a credit for an applicable percentage of child-care expenses for children under 13 and disabled dependents. Eligible expenses for one child are $3,000 and for two children $6,000 respectively.
- Child tax credit: The bill permanently extends the increased child tax credit of $1,000 to families with income below certain threshold amounts.
- Coverdell educational savings accounts: The bill permanently extends the expanded annual contribution amount from $500 to $2,000 and the expanded the definition of education expenses to include elementary and secondary school expenses.
- Estate (death) tax: The bill permanently extends the policy of a $5M exemption, indexed for inflation and a 40 percent top rate. It also permanently extended the portability for any unused portion of a spouse's estate to the surviving spouse. This is significant for family-owned businesses and farmers.
- Gift tax exemption: The bill permanently extends the $5M exemption.
- Personal exemption phase out (PEP): The bill extends the repeal of PEP on income at or below $250,000 (individual filers), $275,000 (heads of households) and $300,000 (married filing jointly) for taxable years beginning after Dec. 31, 2012.
- Alternative minimum tax (AMT): The bill increases the exemption amounts for 2012 to $50,600 (individuals) and $78,750 (married filing jointly) and indexes the exemption and phase-out amounts thereafter.
- Temporary payroll tax cut: This was allowed to expire, which will increase employee social security tax withholding by 2%.
- Tax-tree IRA distributions to charity: Extends to 2012 and 2013 the exclusion from gross income of qualified charitable distributions from IRAs. In addition, any qualified charitable tax distribution made after Dec. 31, 2012 and before Feb. 1, 2013 will be treated as if it had been made on Dec. 31, 2012.
Page 2 of 2 - Spending policy
- Debt limit: No increase was approved for the debt limit which stands at $16.394 trillion. The government estimates that it will reach this limit in February, which will lead to more fiscal drama.
- Sequester or mandatory budget cuts: These cuts are deferred for two months.
The last minute, late-night actions of our federal government only addressed the immediate crisis and not the overall budget issue, which is a growing and unsustainable debt. As usual, the government has kicked the can down the road for another two months.
What will happen? During a similar crisis on Aug. 5, 2011, the credit-rating agency Standard & Poor's downgraded the credit rating of U.S. government bond for the first time in the country's history. Markets around the world as well as the three major indexes in the U.S. then experienced their most volatile week since the 2008 financial crisis with the Dow Jones Industrial Average plunging for 635 points (or 5.6 percent) in one day (Wikipedia).
And so we drift towards another round of the ongoing fiscal crisis. Although there has been some positive economic news, future uncertainty is a very ugly word to the markets.
Previous articles are posted on my web page at http://theretirementexperts.us/. If you would like to comment or make any suggestions, contact me at larrymartin @theretirementexperts.us or call at 651-4321.
Larry Martin is a registered investment advisor offering advisory services through Main Street Advisor, LLC (MSA). The opinions expressed in these articles may not represent those of MSA. 1407 Main Street, Hays, KS 67601. The Consultants Financial Services, LLC and MSA are not affiliated.