Budget and Tax “Fiscal Cliff” Legislation Passes Congress, Is Signed Into Law

Cover Story

By Bruce R. Hopkins, EditorJanuary 18, 2013 | Print

The American Taxpayer Relief Act of 2012 (Pub. L. No. 112-240) (Act) is law, forestalling an immediate tumble over the fiscal cliff. The president signed the measure on January 2, following passage by the Senate (89–8) on January 1 and agreement by the House of Representatives (257–167) much later that day. Passage of this legislation—a $3.9 trillion package—by the now-completed 112th Congress was preceded by considerable political wrangling and posturing.

The Act permanently maintains the tax rates enacted in 2001 and 2003, with those rates now applicable to individuals with income up to $400,000 ($450,000 in the case of married couples). Income in excess of these thresholds will be taxed at higher rates, up to 39.6 percent. Capital gains and dividends will, for those below the thresholds, continue to be taxed at a 15 percent rate, rising to 20 percent for taxpayers who exceed these limits. Higher-earning taxpayers, however, will be subject to a 23.8 percent rate due to the 3.8 percent investment tax enacted as part of the Patient Protection and Affordable Care Act.

The personal exemption phase-out and the limitation of itemized deductions (including the income tax charitable deduction) have been reinstated for individuals with income greater than $250,000 and married couples with income greater than $300,000.

The Act extends the following provisions through 2013:

  • tax-free distributions from individual retirement plans for charitable purposes [9.10(e)]
  • special rules for contributions of capital gain real property made for conservation purposes [9.7(j)]
  • enhanced charitable deduction for contributions of food inventory [9.3]
  • modification of tax treatment of certain payments to controlling tax-exempt organizations [29.7(d)]
  • basis adjustment to stock of S corporations making charitable contributions of property [6.15]

The Act makes permanent the $5 million per spouse estate tax exemption, indexed for inflation. The tax rate, however, is increased from 35 percent to 40 percent. The Act also makes permanent the alternative minimum tax patch. The scheduled automatic spending cuts (sequestration), set by the Budget Control Act of 2011, have been delayed for two months.

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