Fiscal Cliff Legislation
January 8, 2013
After months of negotiations on how best to avoid the economic consequences of year-end tax increases and mandated budget cuts that collectively became known as the “fiscal cliff,” Congress passed legislation on New Year’s Day that averted tax increases on most Americans, delayed for two-months a scheduled budget “sequester,” and did little to address the nation’s long-term fiscal challenges.
President Obama signed H.R. 8, The American Taxpayer Relief Act of 2012 on January 2.
The law allowed current income tax rates to increase from 35% to 39.6% for individuals who earn more than $400,000 annually ($450,000 for married couples). The law also increased the capital gains rate from 15 percent to 20 percent for the same upper income earners. Current income tax rates were extended for those making less than these income thresholds. The law also permanently indexed for inflation the income thresholds for application of the Alternative Minimum Tax (AMT), which threatened to capture millions of additional families. The current “payroll tax holiday” was not extended, however, resulting in higher amounts (an additional 2 percent) being withheld for social security from each worker’s paycheck.
The final legislation included several tax provisions that NAIOP and its real estate allies actively supported and were part of NAIOP’s legislative priorities for 2012, including extension of 15-year qualified leasehold improvement depreciation, 50 percent bonus depreciation provisions, and New Markets Tax Credits. In addition, the capital gains characterization of carried interests (also known as “promoted interests” or “promotes”) remained unchanged. However, as NAIOP President Thomas Bisacquino noted in a response to the passage of fiscal cliff legislation “substantial concerns remain as the legislation delays scheduled budget cuts for only two months and does little to address the nation's long-term fiscal problems.”
Difficult negotiations lie ahead between the White House and the House of Representatives over increasing the nation’s borrowing authority (the “debt limit”), and addressing the $1.2 trillion in mandatory budget cuts that will go into effect on March 1. Republicans, forced to vote for a tax increase in H.R. 8, have vowed to use the upcoming debt limit debate to force the White House to propose long-term changes to federal entitlement programs. For his part, President Obama has already stated that he will not negotiate over increasing the debt limit.
Major provisions of H.R. 8 are set forth below. For additional information, see the Congressional Research Service Summary of The American Taxpayer Relief Act of 2012.
- Income taxes: Makes permanent the tax rates for individual taxpayers whose taxable income does not exceed $400,000 ($450,000 for married couples filing a joint return). Increases the rate from 35 percent to 39.6 percent for those earning above these amounts;
- Capital Gains and Dividends: The top capital gains and dividend rate remain at 15 percent for those below the $450,000/$400,000 income thresholds, and are increased to 20 percent for those with incomes above those amounts.
- Carried Interest: current treatment of carried interest as capital gains is unchanged.
- Tax Extenders: 15-year qualified leasehold improvement depreciation, which expired in 2011, is extended through 2013 and is made retroactive for 2012. Brownfields remediation expensing was not included in H.R. 8.
- Bonus depreciation: The 50 percent bonus depreciation provision is extended for one year (also applicable to leasehold improvements).
- Estate Tax: increases the top marginal estate tax rate from 35 percent to 40 percent; current $5 million per-person estate tax exemption is maintained, with the exemption indexed for inflation;
- Alternative Minimum Tax (AMT): makes permanent the increased exemption from the AMT for individual taxpayers; provides for an inflation adjustment to the AMT exemption amount for calendar years after 2012.
- Exemptions: amends the Internal Revenue Code to: (1) set the threshold for the phaseout of personal tax exemptions and itemized deductions at $250,000 for individual taxpayers ($300,000 for married couples filing a joint return).
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