To avoid the “fiscal cliff” that was predicted if the Bush-era tax cuts expired and the spending cuts became effective in January of 2013 as scheduled, Congress passed the American Taxpayer Relief Act of 2012 (ATRA). The Act represents a compromise—some of the former tax cuts and credits were extended, certain taxes were increased and changes to spending policy were put on hold.
This Business Benefits Group Legislative Brief provides a brief overview of ATRA and how it may affect you.
Affected Tax provisions
The following changes, addressed in ATRA, took effect Jan. 1, 2013:
- Bush-era tax cuts were permanently extended for all individuals earning less than$400,000 ($425,000 for heads of household and $450,000 for joint filers) annually
- For individuals earning more than $400,000 ($425,000 for heads of household and $450,000 for joint filers) annually:
o The Bush-era income tax rates expired, raising tax rates from 35 percent to 39.6 percent
o The maximum capital gains and dividend tax rates increased to 20 percent from 15 percent
- Permanent rates for the Alternative Minimum Tax (AMT) were set, made retroactive to the beginning of 2012 and indexed for inflation; it has been increased to a level that excludes most Americans
- Extension of several expired “temporary” tax breaks for individuals for one or two years
- Estate taxes rose from 35 percent to 40 percent on amounts over $5.12 million (indexed from 2012), and the annual gift exclusion amount is now $14,000
- The Pease limitation and Personal Exemption Phase-out (PEP) reduced the tax deductions and exemptions available to individuals earning more than $250,000 ($300,000 for joint filers) annually
- Multiple tax credits were permanently extended, including a $1,000 child tax credit, child and dependent care credit, earned income credit and adoption assistance credit
Tax provisions Not affected
The following 2013 tax changes were not addressed by ATRA:
- The two-percentage point Social Security payroll tax cut expired, increasing the rate from 4.2 percent to 6.2 percent
- There is now a 3.8 percent Medicare surtax on net investment income for individuals earning more than $200,000 ($250,000 for joint filers) annually
- The 0.9 percentage point payroll tax cut on wages and self-employment income expired for individuals earning more than $200,000 ($250,000 for joint filers) annually
CHANGES IN SPENDING
ATRA does not specifically address spending changes, with one exception.
The Emergency Unemployment Compensation program will be extended through Dec. 28, 2013, for the long-term unemployed.
All other changes to spending policies have been delayed two months, but spending cuts are predicted, particularly to the Department of Defense.
The spending cuts that were scheduled to take effect Jan. 1, 2013, are as follows:
- Elimination of approximately 48,000 federal workers from civil defense jobs, and 229,000 from other federal positions
- A $55 billion, 9 percent spending cut to the Pentagon
- A $55 billion cut in domestic programs, including Medicare providers
- Long-term, $1 trillion military spending cuts
The full effects of ATRA remain unknown. While some economists believe that the permanent tax decreases for the majority of Americans will increase consumer spending and optimism, others feel that the changes in tax rates could slow the economy and reduce growth.