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Fiscal Cliff Averted. Phew. - What's in the 2013 Swag Bag

Posted on Jan 03,2013
Filed Under Local Politics , Politics,

Photo by John Arundel
Smiles all around. Local lobbyists and pols celebrate the end of the Fiscal Cliff at a Ending the Fiscal Cliff party Tuesday night.

By John Arundel


Or not.

It appears that, “we have managed to avert some of the ‘Fiscal Cliff,’" according to President Barack Obama, so we here at Local Kicks wish you a Fiscal Cliff-less Happy New Year and take a peak inside the swag bag of the Fiscal Cliff now being delivered to taxpayers by the President and Congress to give you an idea of what it holds for taxpayers in 2013.

The "fiscal cliff" refers to the economic effects that would have resulted from tax increases, spending cuts, and a corresponding reduction in the US budget deficit, potentially beginning in 2013.

The deficit is projected to be reduced by roughly half in 2013. The Congressional Budget Office estimates that this sharp decrease in the deficit (the fiscal cliff) will likely lead to a mild recession in early 2013 with the unemployment rate rising to roughly 9 percent in the second half of the year.

The laws leading to the fiscal cliff include the expiration of the 2010 Tax Relief Act and planned spending cuts under the Budget Control Act of 2011. Nearly all proposals to avoid the fiscal cliff involve extending certain parts of the Bush tax cuts or changing the 2011 Budget Control Act or both, thus making the deficit larger by reducing taxes or increasing spending. Because of the short-term adverse impact on the economy, the fiscal cliff has stirred intense commentary both inside and outside of Congress.

The Budget Control Act was a compromise intended to resolve a dispute concerning the public debt ceiling. Some major programs, like Social Security, Medicaid, federal pay (including military pay and pensions), and veterans' benefits, are exempted from the spending cuts. Spending for defense, federal agencies and cabinet departments would be reduced through broad, shallow cuts referred to as budget sequestration.

At around 2 a.m. on Tuesday, the Senate passed a compromise bill, the proposed American Taxpayer Relief Act of 2012, by a margin of 89–8. The bill would delay the budget sequestration by two months, and includes $600 billion over ten years in new tax revenue relative to extending 2012 levels, which is about one-fifth of the revenue that would have been raised had no legislation been passed.

The revenue would come from increased marginal income and capital gains tax rates relative to their 2012 levels for annual income over $400,000 for individuals and $450,000 for couples; a phase-out of certain tax deductions and credits for those with incomes over $250,000 for individuals and $300,000 for couples, an increase in estate taxes relative to 2012 levels on estates over $5 million, and expiration of the two-year-old cut to payroll taxes, which is applied to income under the Social Security Wage Base, which was $110,100 in 2012. These changes would all be made permanent. The House passed the bill without amendments by a margin of 257–167 around 11 p.m. EST on Tuesday.

For advice on what this all means, Local Kicks turned to Leon LaBrecque, JD, CPA, CFP, CFA, Chief Strategist and founder of LJPR, a firm managing $470 million in assets, on what this all means. Below, LaBrecque outlines some of the major items in the Fiscal Cliff Swag Bag:

  1. The top tax rate will permanently rise to 39.6% for families with income above $450,000 and individuals above $400,000, up from the current top rate of 35%
  2. The tax on capital gains and dividends will be permanently set at 20% for those with income above the $450,000/$400,000 threshold. It will remain at 15% for everyone else.
  3. The estate tax will be set at 40% up from the current level of 35% for those with estates over $5million ($10 million for couples), and it will be indexed to infla¬tion.
  4. The 2009 expansion of tax breaks for low-income Americans: the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit will be extended for five years.
  5. Includes a permanent patch fix for the alternative minimum tax (AMT)
  6. The payroll tax holiday will be allowed to expire.
  7. Two limits on tax exemptions and deductions for higher-income Americans will be re-imposed: Personal Exemption Phase out (PEP) will be set at $250,000 and the itemized deduction limitation (Pease) kicks in at $300,000.
  8. The full package of temporary business tax cuts will be extended for another year.
  9. Provisions for the doc fix, avoids a cut in payments to doctors treating patients on Medicare.
  10. Federal unemployment insurance will be extended for another year, benefiting those unemployed for longer than 26 weeks.
  11. A nine-month farm bill fix will be attached to the deal.
  12. The pay freeze on members of Congress, which Obama had lifted earlier this year, will be re-imposed.
  13. The sequestration cuts will be delayed for two months. Half of the delay will be offset by discretionary cuts, split between defense and non-defense spending.
  14. The new tax law extends the ability to make Qualified Charitable Deductions (QCDs) of RMDs directly (or indirectly) to charity.

2013. Let's make it a great year.

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