The 112th Congress was recently dubbed the “Do Nothing Congress” for the minimal amount of legislation enacted during the two-year session. Two hours after going over the fiscal cliff at midnight on Jan. 1, the Senate voted 89-8, and the House of Representatives voted 257-167 to pass the American Taxpayer Relief Act of 2012 to reverse some of the measures which may have had a severe negative impact upon the economy.
The Congressional Budget Office projects the legislation will add $4 trillion to the U.S. deficit over the next 10 years compared to a scenario where the Bush tax cuts had been allowed to expire.
The Senate bill also sets up what is likely to be an even more heated fight in late February when the Treasury Department must come to Congress to seek an increase in the government's borrowing limit.
Among the key prrovisions of the American Taxpayer Relief Act of 2012:
• Tax rates will be allowed to rise on individual incomes over $400,000 per year, and household incomes over $450,000 per year to a maximum rate of 39.6 percent.
• The tax on estates would rise to a 40 percent maximum rate, with a permanent exemption of $5.25 million, indexed for inflation.
• Permanently sets maximum long-term capital gain and dividend tax rates at 20 percent for households making more than $450,000.
• Phases out itemized deductions and personal exemptions for those making more than $250,000, $300,000 joint.
• Permanently sets maximum long-term capital gain and dividend tax rates at 15 percent for households making less than $450,000.
• The 2 percent temporary decrease in FICA payroll taxes relief was allowed to expire. This provision has a disproportionate impact on those making less than $113,700 (the FICA limit in 2013). This is expected to take $125 billion out of consumer income.
• Extends the tuition tax credit and child and dependent care tax credits for five years.
• Workers will be allowed to rollover 401(k) funds to a Roth IRA while still actively participating in a 401(k) plan. Think of it as an ‘In-Service’ distribution.
• Permanent adoption of the Alternative Minimum Tax exemption amounts. Impacts 32 million Americans who may have been subjected to AMT in 2012 and indexes AMT for inflation.
• Postpones $109 billion sequester for two months.
• Extends unemployment insurance for two million long-term unemployed Americans.
• Extension of the 2008 Farm Bill through the end of this fiscal year (Sept. 30, 2013). Keeps the price of milk from potentially doubling.
• Prevents a 27 percent reduction in Medicare payments to doctors and other health care providers treating patients on Medicare.
• Mike Piershale, ChFC, is president of Piershale Financial Group. Send any financial questions you wish to have answered in this column to Piershale Financial Group Inc., 407 Congress Parkway, Crystal Lake, 60014. You may also fax them at 815-455-6895 or email Mike.Piershale@PiershaleFinancial.com.