Fiscal Cliff Postponed

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In a 13th hour drama, Congress averted the “fiscal cliff” by passing legislation late into the evening on New Year’s Day.  The bill avoids wide tax increases and budget cuts which were scheduled to take effect January 1st.  The measure would raise taxes by about $600 billion over the next  10 years.  Unfortunately, the bill also “kicks the can down the road”, for two months at least, the NEEDED across-the-board budget cuts to entitlements, domestic agencies, defense and the numerous boondoggles Congress has loaded in various spending bills in the past. We can expect another 13th hour showdown on those issues as the debt ceiling extension looms big in 60 days.

The House and Senate passed the bill Tuesday and sent it to President Barack Obama for his signature.

Here are some highlights of the bill include:

  1. Income tax rates: Extends Bush tax rates on incomes up to $400,000 for individuals, $450,000 for couples. Earnings above those amounts will now be taxed at a higher rate of 39.6%, up from the current 35%. The bill also extends Clinton-era caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.
  2. Estate tax rates: Permanently extends the $5 million dollar exemption for individual estates ($10 million for couples).  Note that current exemption, indexed for inflation, is currently $5,120,000. However, the new TOP RATE for estates would be taxed at 40% (increased from 35%).  More important, the exemption amount (for gift and estate taxes) remains unified and is permanently extended for estates and gifts made after 12/31/12. Portability of the unused credit is also made permanent.
  3. Capital gains and dividends: Increases taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families from 15% to 20%.
  4. Social Security payroll tax increase: The previous 2-percentage-point cut in the payroll tax first enacted two years ago will lapse, restoring the payroll tax to 6.2%.
  5. Alternative Minimum Tax (“AMT”): Permanently enacts indexing AMT for inflation to prevent nearly 30 million middle-and upper-middle-income taxpayers from being hit with higher tax bills averaging almost $3,000. The tax was originally designed to ensure the wealthy did not avoid owing taxes by using loopholes.
  6. Other changes to Tax Credits: Extends for five years the child tax credit, the earned income tax credit, and an up-to-$2,500 tax credit for college tuition. Also extends for one year accelerated “bonus” depreciation of business investments in new property and equipment, a tax credit for research and development costs and a tax credit for renewable energy such as wind-generated electricity.
  7. Unemployment benefits: Extends jobless benefits for the long-term unemployed for one year.
  8. Blocks Medicare reimbursements reductions to doctors: The 27% cut in Medicare payments to doctors was deferred for one year. The cut is the product of an obsolete 1997 budget formula.
  9. Delays Across-the-board budget cuts: The $109 billion worth of across-the-board spending cuts set to start striking the Pentagon and domestic agencies this week was postponed 2 months. Cost of $24 billion is divided between spending cuts and new revenues from rule changes on converting traditional individual retirement accounts into Roth IRAs.

 

 

This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.