The Bush tax cuts will become permanent for all individual income below $400,000 (and family income below $450,000). The sequester spending cuts will be delayed two months.
Hidden in the last-hour vote in Congress to avoid the “fiscal cliff” included all sorts of arcane provisions into the final bill, covering everything from electric scooters to NASCAR racetracks as well as commuter tax breaks to help public transit a provision that extends the Mortgage Forgiveness Debt Relief Act through 2013. Most of these tax breaks were already longstanding provisions — Congress has been working to renew them all year and they stuff this stuff in bills nobody reads.
Transit commuters scored an unexpected windfall. Included in the package of tax increases was the restoration of a commuter benefits program that allows workers to pay for up to $240 of their monthly transit costs with pre-tax dollars. Transit passengers could exempt up to $1,500 of their annual commute costs from taxes as a result of the legislation.
Congress has been trying to promote electric cars through an assorted tax deals. This time it is electric bikes and scooters? Section 403 of the bill extends a credit for “2- or 3-wheeled plug-in electric vehicles.”
Section 328 of the bill extends tax-exempt financing for the “Liberty Zone,” the area around the former World Trade Center, for another year. This helped the tax-exempt construction of Goldman Sachs’ new headquarters.
Then there is Section 322 of the bill. “Extension of the Active Financing Exception to Subpart F.” which was a $9 billion deal for the bankers. This provision was first created in 1997, and allowed manufacturers and banks to defer taxes when they engage in a special type of financial transaction known as “active financing”. The break encourages firms to create jobs overseas while the top lobbying priority argues it helps them compete abroad. End worldwide taxation and Americans might export American labor as do Europeans.
The real interesting aspect is that the tax code officially discriminates against getting married. On the tax front, they retained the income tax rates at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6% as would have occurred under the EGTRRA sunset). A 39.6% rate applies to income above a certain threshold (specifically, income in excess of the “applicable threshold” over the dollar amount at which the 35% bracket begins). The applicable threshold is $450,000 for joint filers and surviving spouses, $425,000 for heads of household, $400,000 for single filers, and $225,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. These dollar amounts are inflation-adjusted for tax years after 2013. This means there is a huge marriage penalty in there. Two single people living together would get two $400,000 exemptions (one each). A married couple gets hit when combined income exceeds $450,000. Clearly, those same-sex couples who are rushing out to get married should look at this one. Of course, they have been discriminated against where two people who lived together as a couple were forced to pay inheritance tax on the half of the house if the partner died.
Despite the news pretending taxes went up on the rich, sorry, they got everyone. The Payroll Tax Cut was allowed to Expire. While technically not part of the new law, Congress has let the temporary reduction in payroll taxes expire. Wage earners in all brackets will feel the pain of this expiration in their take-home pay starting now. The will see about a 2% increase in taxation. Even if some get a refund, they are lending government interest free.
The personal exemptions begin to phase out for those making $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. The total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer’s adjusted gross income exceeds the applicable threshold. This is inflation-adjusted for tax years after 2013.
The Itemized deductions are reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. The starting thresholds are $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Inflation adjustments apply after 2013.
Hence, this phaseout, reduced itemized deductions, and the payroll tax increase, will increase the income taxes of persons below the $400,000/$450,000. Then we have the new 3.8% Obamacare taxes that will also now apply as well as increase in SS taxes.
The top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). This will reduce investment and hurt job creation. For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will permanently be subject to a 0% rate. Taxpayers who are subject to a 25%-or-greater rate on ordinary income, but whose income levels fall below the $400,000/$450,000 thresholds, will continue to be subject to a 15% rate on capital gains and dividends.
Estate and Gift Tax Rates will see the maximum rates increased to 40%. Obama wanted 55%. This confirms you are an economic slave. You pay your taxes all your life and then they want 40% of what you saved when you die.
The Unified Credit for Transfer Taxes/GST Exemption was retained at $5 million, as adjusted for inflation. For 2013, this amount has been estimated at $5.25 million. Portability of unused credit between spouses has also been retained. There was a frantic gift giving in December before year end.
There was a temporary extension through 2013 (and to include 2012) for tax-free distributions from individual retirement plans for charitable purposes. There was also a temporary extension to January 1, 2014 for Subpart F exception for active financing income for controlled foreign corporations. And there was an extension of look-through treatment of payments between related controlled foreign corporations under foreign personal holding company rules.