A fall over the dreaded fiscal cliff has been avoided—at least for now. Unless pre-occupied by New Year’s revelry or college football bowl games, all of us are well, and perhaps painfully, aware that Congress managed to by-pass the dreaded fiscal cliff by passing a tax relief bill on January 1, 2013. A very ungainly legislative process came to a merciful end when the Senate passed the legislation in the pre-dawn hours of 2013 by an overwhelming vote of 89-8. Then, after a day of high drama and rumors of Republican intent to amend the legislation and sent it back to the Senate for additional consideration (which would have had uncertain consequences), the House relented and passed the legislation as enacted by the Senate. The vote in the House was 257-167, with 172 Democrats and 85 Republicans supporting the measure. President Obama has signed the legislation into law. It is difficult to watch this spectacle and not be reminded of the old adage “laws are like sausages, it is better not to see them being made”—and without feeling a bit sorry for sausage makers everywhere for being so linked to Congress.
Some of the more significant provisions in the bill are as follows:
- the 10% individual income tax bracket, scheduled to expire at the end of 2012, was extended permanently;
- the 25%, 28%, and 33% income tax rates, also scheduled to expire at the end of 2012, were extended permanently for income at or below $400,000 for individual filers and for income at or below $425,000 for heads of households and $450,000 for married taxpayers filing jointly, and a new 39.6% income tax rate will be imposed above those limits;
- the personal exemption phase-out is permanently repealed for all taxpayers at or below certain income levels ($250,000 for individual filers, $275,000 for heads of households and $300,000 for married filing jointly);
- the itemized deduction limitation is permanently repealed for all taxpayers at or below certain income levels ($250,000 for individual filers, $275,000 for heads of households and $300,000 for married filing jointly);
- the bill permanently extends the 2001 modifications to the child tax credit;
- the bill permanently extends marriage penalty relief;
- the bill permanently extends expanded Coverdell accounts;
- the bill permanently extends the expanded $5,250 exclusion for employer-provided educational assistance;
- the bill permanently extends the expanded student loan interest deduction;
- the bill permanently extends the exclusion from income of amounts received under certain scholarship programs;
- the bill permanently extends the expanded dependent care credit;
- the bill permanently extends the adoption tax credit and the adoption assistance programs exclusion;
- the bill permanently extends the credit for employer expenses for child care assistance;
- the bill continues to provide a $5 million exception for estate tax liability, which is inflation adjusted, and will apply a top tax rate 40 percent to estates of decedents dying after December 31, 2012;
- the bill permanently extends the current capital gains and dividends rates on income at or below $400,000 (individual filers), $425,000 (heads of households) and $450,000 (married filing jointly) for taxable years beginning after December 31, 2012, and applies a 20 % rate on income in excess of those limits;
- effective for years beginning after December 31, 2011, the bill increases the AMT exemption amounts (from $33,750 to $50,600 individuals and from $45,000 to $78,750 for married filing jointly), and allows nonrefundable personal credits against the AMT;
- the bill extends through 2013 the increase (from $125 to $240) in the exclusion from income for employer-provided mass transit and parking benefits, so that it is the same as the exclusion for employer-provided parking benefits;
- the bill extends for two years the provision that permits annual tax-free distributions to charity from an IRA held by someone age 70 1⁄2 or older of up to $100,000 per taxpayer, per taxable year (and includes a provision under which an individual can make a rollover during January of 2013 and have it count as a 2012 rollover);
- the bill extends for two years, through 2013, the research tax credit equal to 20 percent of the amount by which a taxpayer’s qualified research expenses for a taxable year exceed its base amount for that year and provides an alternative simplified credit of 14 percent; and
- the bill permits any amount in a non-Roth account in eligible retirement plans to be converted to a Roth account in the same plan, whether or not the amount is distributable with the amount so converted being subject to regular income tax (plans currently can allow participants to convert their pre-tax accounts to Roth accounts but only with respect to money the participants have a right to take out of the plan).
The bill extends for one year the availability of benefits under the Emergency Unemployment Compensation Program, and continues for one year the benefits under the extended benefit program with a 3-year look-back. The 2% payroll tax holiday was not extended under the bill.
It appears that the only significant employee benefit plan matter covered in the bill is the expanded in-plan Roth conversions (discussed above). This change produces a $12 billion revenue offset, and thus the reason for its inclusion is obvious. Most of the employee benefits industry supports this change, although the hope for many was that it could be held back for the next wave of fiscal cliff negotiations, which essentially starts right after the new Congress is sworn in, as a way to defend against efforts to raise revenue by increasing contribution limits. Employee benefits issues likely will draw some attention in the continuing fiscal negotiations.
Next up are the budget, the expiration of the debt limit and the sequestration (mandatory spending cuts) under the Budget Control Act. In a classic case of kick the can, the bill moves sequestration forward a mere two months. To make things more interesting, the debt limit will expire at about the same time. Battle sides are forming. In comments after passage of the bill, President Obama indicated he plans to seek additional tax revenue through tax reform to partially fund sequestration relief and deal with deficit. Republicans are likely to oppose such a move (some already have said this publicly). There still are more cliffs ahead of us.