President Obama and the GOP have started negotiations to avoid the so-called “fiscal cliff,” the combination of expiring tax cuts and across-the-board spending cuts scheduled to take affect after 2012. President Obama, strengthened by his election win, is expected to push for a package of tax increases and spending cuts. Republicans, following their setbacks, may be open to revisiting their pre-election position of no tax increases.
Comment: “For many taxpayers, especially business taxpayers, the biggest issue looming before year-end is the uncertainty over what their tax obligations will be next year,” said Robert Jazwinski, CPA, president of the Pennsylvania Institute of Certified Public Accountants (PICPA). “After the election, there is the expectation that leaders in Washington will begin to work on legislation to alleviate the negative implications of the fiscal cliff,” Jazwinski predicted.
Tax cuts
Reduced individual income tax rates, lower capital gains and dividends tax rates, the $1,000 child tax credit, and other tax provisions enacted during the Bush administration and extended by the Tax Relief Act of 2010 are scheduled to sunset after December 31, 2012. Many individual tax extenders have already expired or will expire after 2012. In addition, the alternative minimum tax (AMT) is on course to expand its reach into middle income households, without a 2012 “patch,” and the employee-side payroll tax holiday will expire after December 31, 2012.
Comment: Since winning re-election, President Obama has reiterated his opposition to extending the expiring tax cuts for higher income taxpayers. President Obama has used the income thresholds of $200,000 for single individuals and $250,000 for families to describe the end point of extending the cuts. Some lawmakers have floated higher income thresholds (such as $500,000 or $1 million).
House Speaker John Boehner, R-Ohio, has indicated that the GOP may be open to raising revenues but apparently only through tax reform, which could cap some unspecified deductions for higher income individuals. Sen. Bob Corker, R-Tenn., predicted that entitlement reform would be a greater stumbling block to reaching an agreement than taxes.
Estate and gift taxes
The maximum federal estate tax rate is scheduled to increase to 55 percent for estates of decedents dying after December 31, 2012, without Congressional intervention. The estate tax exclusion will fall from $5.12 million to $1 million after 2012 and portability will no longer be available.
Businesses
Corporate tax reform may take a back seat to negotiations over taxes on individuals and spending cuts. Some expired business extenders could be extended as part of a year-end agreement. These include the research tax credit, the Work Opportunity Tax Credit (WOTC) for veterans and nonveterans, and others. Bonus depreciation and enhanced small business expensing could also be revived in a year-end agreement.
Affordable Care Act
The President’s re-election means that the tax provisions in the Patient Protection and Affordable Care Act (PPACA) will move forward. On January 1, 2013, the new 3.8 percent Medicare contribution tax and 0.9 percent additional Medicare tax will take effect, largely impacting higher income taxpayers. New rules limiting the itemized deduction for qualified medical expenses to a 10 percent floor and a $2,500 cap on contributions to health flexible spending arrangements also kick-in.Ne
