Washington News

After determining that the votes were not present to pass the Permanent Tax Relief for Families and Small Businesses Act of 2012, Speaker of the House John Boehner (R-OH) adjourned Congress for the holidays.

On Friday, December 21, 2012, the House, Senate and President all departed Washington for their home districts and vacations. It is probable that they will return the first week of January and restart negotiations.

The bill was popularly called "Plan B" and included a number of tax provisions. While Congress and the White House have not yet come to a complete agreement, many of these provisions are likely to be in an eventual compromise tax bill. The probable January compromise will include increased taxes on individuals with higher incomes and retention of most existing tax provisions for the middle-class.

The "Plan B" provisions include the following items.

1. Upper Incomes – Individuals with incomes over $1 million would pay 39.6% tax on income and 20% tax on long-term capital gains.

2. Itemized Deductions and Exemption Phaseouts – The PEP and Pease phaseouts (3% of itemized deductions and personal exemptions) for upper-income taxpayers would be repealed.

3. Child Credit – The $1,000 per child credit is continued.

4. Marriage Penalty Relief – The increase in the brackets for married couples and other provisions to protect marriage would be maintained.

5. Estate Taxes – The exemption per decedent would continue to be $5 million (plus indexed increases) and the gift and estate tax rate would be 35%.

6. Small Business Expensing – The Section 179 limit would be $250,000.

7. Alternative Minimum Tax (AMT) – The AMT exemption would be adjusted each year for inflation.

Editor's Note: While there may be adjustment of the $1 million limit, most of these provisions are now likely to be included in the future tax bill. There will continue to be debate over the level of tax increases on persons with higher incomes and the various limits on spending. An upcoming deadline is the need by February or March to increase the national debt limit. It is quite possible that a bill that covers taxes, spending limits and the national debt increase will be passed. Most of the tax provisions will be retroactive to January 1, 2013.

Fiscal Cliff Impact on January 1, 2013

If there is no bill by January 1, 2013, there are several potential impacts. There will be sequestration, or limits on spending, affecting the Department of Defense, Medicare and various other governmental organizations. Tax rates automatically return to the 2001 schedules. This will lead to a top rate increase from 35% in 2012 to 39.6% in 2013.

For more than 80 million Americans who must file tax returns for 2012, the IRS is warning that there are substantial challenges. At present, there is not a clear determination of the exemption for alternative minimum tax (AMT). Acting IRS Commissioner Stephen Miller states, "The IRS cannot process the returns of any taxpayers whose return characteristics do not allow us to differentiate them from those whose tax liability will be altered by the AMT expiration."

Miller explained that it may not be possible to process tax returns for the over 80 million taxpayers who are potentially subject to AMT until March or April. Any refunds could be delayed for six to eight weeks. Miller shared those concerns this week in a letter to House Ways and Means Committee Chair Dave Camp (R-MI).

All employers will also need to estimate the appropriate withholding amounts based on 2012 law. Because a probable tax bill will be retroactive to January 1 of 2013, it will be difficult to use the 2013 tables during January.

For individuals who pass away with larger estates, the $5.12 million estate exemption of 2012 reverts to $1 million in 2013. This will dramatically increase the number of estates subject to tax. Because estate tax returns for 2013 decedents are not due for nine months, it is quite possible that the legislation to restore the $5 million exemption (with indexed increases) will pass prior to the required date to file.

Finally, Congress has been annually passing a "doc fix" that maintains the level of payments for doctors providing services to Medicare patients. Until the "doc fix" is passed, reimbursements to physicians will be 27% lower than the past year.