The 2012 Taxpayer Relief Act Demystified
The passage of the American Taxpayer Relief Act of 2012 signaled the end of round one of the contentious battle within Congress to reduce the size of the federal deficit. While Congress failed to enact far-reaching legislation to materially reduce budget deficits, it did enough to put mandated spending cuts on hold for the immediate future and thwart an income tax hike on 99 percent of Americans scheduled to occur upon the expiration of the 2001 and 2003 Bush tax cuts, avoiding for now the socalled “fiscal cliff.” It also set the stage for heated debate over the next few months as both parties in Congress try to advance their solutions to address the spending side of the equation.
To the chagrin of conservative republicans and liberal democrats, enough bipartisan support was garnered to make the 2001 and 2003 Bush tax cuts “permanent,” except for those individuals earning more than $400,000 ($450,000 jointly); for those taxpayers - the wealthiest 1 percent - the tax rate went from the previous top marginal bracket of 35 percent to 39.6 percent, beginning with 2013. The additional taxes generated are estimated at $600 billion over the next ten years; however, this will have very little impact in narrowing a budget deficit currently in excess of $1 trillion per year.
In addition to the tax bracket changes, Congress increased the tax rate on dividend income and capital gains from 15 percent to 20 percent, again on those taxpayers earning in excess of $400,000.
This “high earner” group is also subject to a 3.8 percent surcharge on net investment income already scheduled to commence under the Patient Protection and Affordable Care Act (“Obamacare”). Taxpayers will be also be subject to a .9 percent medicare surcharge on earnings in excess of $200,000 ($250,000 joint) under Obamacare, on top of the present 1.2 percent assessed on all wages earned. The estimated additional revenue of $350 billion over 10 years will also have minimal impact on the budget deficit.
Congress also addressed the estate tax limits set to expire by agreeing to exempt the first $5.12 million from estate taxes (would have gone down to $1 million without action) while raising the tax rate on estates in excess of the new amount from the present top rate of 35 percent to 40 percent (would have gone to 55 percent without action). While the rate did increase, the exemption increase was seen as a victory for House and Senate republicansand affording certainty and relief to small businesses in estate planning.
One of the tax cuts allowed to expire under the Taxpayer Relief Act was the temporary reduction in employment taxes made in 2011. Social Security withholding tax rates were lowered from 6.2 percent to 4.2 percent in 2011 and further extended through 2012, increasing take-home pay in an effort to stimulate consumer spending (employer matching rates remained at 6.2 percent). While this may have helped shore up the economy during the last two years, it reduced the tax receipts to pay for retiree benefits, exacerbating the continuing funding problem with Social Security. The expiration of the reduction in employment taxes will protect Social Security but will certainly be noticeable to wage earners as they receive their paychecks in 2013. For example, a person earning $50,000 will see their Social Security taxes increase in 2013 by $1,000 (roughly $90 per month) due to the rate expiration; employees will undoubtedly tighten up their belts in spending to offset the increase which may further slow the economic recovery.
For businesses, the most important provision passed within the Taxpayer Relief Act was the extension of the accelerated write-off of qualified equipment purchases to 2012 (retroactively) and through 2013; the maximum limit of the write-off amount was also increased to $500,000 per year. This means that the first $500,000 of qualifying expenditures for new or used equipment and software can be written off immediately; further, amounts in excess of the $500,000 limitation are eligible for “bonus depreciation” treatment - under certain conditions - allowing further acceleration of equipment write-off. This is intended to spur capital reinvestment and will be particularly useful to companies in 2013.
As taxpayers and businesses assess the recent tax changes, they need to consult competent tax and business experts as these are just some of the new tax law changes enacted.
The changes implemented by the American Taxpayer Relief Act of 2012 address only a small piece of the “fiscal cliff” issue and only scratch the surface of what lawmakers need to address in the coming months. Massive spending cuts in all government programs must be agreed to, something Republicans are demanding which Democrats argue will not come without further “revenue enhancements.”
Another material piece of legislation implemented in 2012 was The Patient Protection and Affordable Care Act which was established to reduce the number of uninsured and underinsured Americans by requiring individuals to obtain minimum insurance coverage and employers to offer employees access to health insurance coverage, either through existing group plan coverage or through health insurance exchanges that are to be created as part of the Act. The Act, signed into law in 2010, has many provisions that begin in 2014.
Individuals that cannot afford health care coverage will be eligible to receive assistance from the government to enable them to obtain insurance; those that do not elect coverage are subject to an annual fine of $95 in 2014, rising to $695 in 2016.
Employers with less than 50 employees are exempt from the Act. Large businesses - defined as employers with more than 50 employees and who work more than 30 hours per week - must provide their employees with access to a health insurance plan that contains an essential benefit design including preventative care features. Coverage can be obtained through private insurance carriers or through the insurance exchanges to be set up. Large companies can be subject to penalties - up to $2,000 per employee - if their employees receive insurance from the public exchanges or do not provide health insurance coverage employees can elect.
Companies that may be affected the most are those with less than 100 full-time employees as they may not offer coverage today; for those businesses, there are tax credits available to assist them in defraying some of the costs.
Proponents of the Affordable Care Act say that more Americans will be covered by health insurance and costs will increase negligibly; opponents believe the Act will lead to greatly increased costs for everyone and is a massive expansion of government spending.
Regardless, most of the provisions and requirements of employers go into effect in 2014 so all employers must evaluate their present insurance program offerings and compensation levels to determine the potential impact and ensure at least minimal compliance.
So get ready for more political theater and further uncertainty - it’s going to be a wild ride and the result will have something for everyone to dislike.
Ken Barloon was the Chief Financial Officer for CDS Global - A Hearst Company. He is now an independent business management consultant specializing in finance.