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A Fiscal Cliff Deal Emerges

Presented by Rajesh Jyotishi Email Presented by Rajesh Jyotishi
February 2013
A Fiscal Cliff Deal Emerges

A list of key details in the bipartisan agreement.

Better late than never, a bill arrives. While it is late, small-scale, and certainly no “grand bargain,” the fiscal cliff fix that Congress has hastily assembled is welcome nevertheless.

Assuming the measure passes and quickly becomes law, what changes would occur? Here are the major details in the bill, which in the big picture would raise taxes by roughly $600 billion across the next ten years.

The Bush-era tax cuts would be preserved for 98% of Americans. The cuts would only expire for individual taxpayers making more than $400,000 and households making more than $450,000. Earnings above those amounts would be taxed at 39.6%, a 4.6% increase from 2012. This new top tax rate of 39.6% will be permanent.

Personal exemption phase-outs and itemized deduction caps would return. Gone since 2001, but resurfacing in 2013, personal exemption phase-outs would start at $250,000 for single filers and $300,000 for households next year, and the value of itemized deductions would be curbed at those same thresholds.

Estate taxes would top out at 40%. Additionally, the agreement adjusts the estate tax exemption to $5 million. Both of these changes will be considered permanent. The White House had wanted a 45% estate tax rate with a $3.5 million exemption.

The Alternative Minimum Tax (AMT) would be indexed for inflation. No one will object to this permanent fix. Almost 30 million taxpayers would be spared from seeing their 2012 federal taxes rise by an average of about $3,000 thanks to this provision.

Taxes on capital gains and dividends would rise for the rich. The good news is that top earners would not see their dividends taxed as ordinary income. Dividends and capital gains would both be taxed at 20% for individuals making more than $400,000 and households making more than $450,000. Wealthy investors paid a 15% tax on long-term capital gains and qualified dividends in 2012.

Long-term unemployment benefits would be spared. They will be sustained through the end of 2013 if the bipartisan bill is passed.

The payroll tax holiday would end in 2013. Social Security taxes for employees would return to the 6.2% level next year from the current 4.2% rate.

A 27% cut in Medicare payments to physicians would be avoided. These threatened cuts emerge annually due to the preservation of an old budget formula (drawn up in 1997). If the AMT can be fixed, perhaps this can be fixed as well during 2013.

The Earned Income Tax Credit, American Opportunity Tax Credit, and Child Tax Credit would be extended through 2017. President Obama has long sought to preserve the $2,500 AOTC for college expenses, the EITC, and the Child Tax Credit. Passage of the agreement would make it happen.

Bonus depreciation would be preserved for 2013. This is the tax break that permits companies to accelerate depreciation schedules for major capital investments. (Preserving this break may also imply preservation of the current Section 179 software and equipment deduction; its limit is set to diminish in 2013.)

Renewable energy and R&D tax credits would be sustained. Both credits would be preserved for 2013 by the fiscal cliff deal.

What about the “sequester”? On Monday afternoon, 12/31/12, Sen. John McCain (R-AZ) told Reuters that the Senate was considering a two-month delay of the federal spending cuts set to kick in on January 2. (It would arrange $24 billion in “other” spending cuts instead.) Some of the cuts slated may be put off or be altered in scope.

The market liked what it heard that day. The Dow Jones Industrial Average rose 166.03 points on the year’s final trading day, buoyed by renewed hopes that legislators would work something out at last. Ideally, Wall Street will maintain this optimism. Here’s hoping it is shared by foreign investors and the major credit ratings firms.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note—investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Moneywise is hosted by Rajesh Jyotishi with Shalin Financial Services, Inc.  Rajesh is an investment advisor representative of Resource Horizons Group, L.L.C., a registered broker-dealer, and a member FINRA/SIPC. Advisory services are offered through Resource Horizons Investment Advisory.  Rajesh has been in the insurance, investments and financial planning field since 1991.  He can be reached at 770- 451-1932, ext. 101 or at RJ@shalinfinancial.com.   

 

 


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