At 2AM this morning, the Senate passed H.R. 8, the American Taxpayer Relief Act of 2012, by a vote of 89-8. Voting no were Bennet (D-CO), Carper (D-DE), Grassley (R-IA), Harkin (D-IA), Lee (R-UT), Paul (R-KY), Rubio (R-FL), and Shelby (R-AL). Not voting were DeMint (R-SC), Kirk (R-IL), and Lautenberg (D-NJ). TaxProfBlog has the text of Senate-passed bill (157 pages). The Joint Committee on Taxation (JCT) has also produced a revenue estimate, as has the Congressional Budget Office (CBO). The House of Representatives is expected to vote on the bill today sometime. (UPDATE: Just after 11pm, the House of Representatives voted 257-167 to adopt the Senate bill without amendment. The President signed the bill into law on January 3.)
Because the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. cuts were scheduled to expire anyway, JCT scores it as a $3.9 trillion tax cut over 10 years; compared to current policy, however, it is a $620 billion tax increase (plus $15 billion in spending cuts according to JCT, or minus $57 billion in spending increases according to CBO). (More details on the fiscal cliff and the 10-year budget estimates here.)
Key elements of the deal:
- Retains the 10 percent, 15 percent, 25 percent, and 28 percent income tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. from the Bush tax cuts permanently
- Retains the 33 percent and 35 percent income tax brackets from the Bush tax cuts for taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. under $400,000 (single), $425,000 (head of household), and $450,000 (joint filers). Imposes 39.6 percent tax rate on income above this level.
- Phases out personal exemptions (PEP) for adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers)
- Limits itemized deductions (Pease) for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers)
- Capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. and dividends tax will be 20 percent for taxpayers with income over $400,000 (single) and $450,000 (joint filers). This does not include the new 3.8 percent health care tax on investment income above $200,000 (single) and $250,000 (joint filers) in adjusted gross income, so the top rate for capital gains and dividends will be 23.8 percent. For lower income levels, the tax will be 0 percent, 15 percent, or 18.8 percent.
- Continues setting the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. for joint filers at 2 times single filers (would have otherwise reverted to 1.67 times single filers)
- Permanently sets Alternative Minimum Tax (AMT) exemption at $50,600 (single) and $78,750 (joint filers) for 2012 and adjusts for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. thereafter
- One year extension of 50 percent bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. rules
- Extends American Opportunity Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (education) through 2017
- Extends the various “extenders” tax incentives through 2013
- Retains the doubled child tax credit ($1,000) permanently, its refundable portion through 2017, and the expanded earned income tax credit (EITC) through 2017
- Raises estate and gift taxA gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax. to 40 percent, but above the current exemption level (~$5.12 million) and adjusted for inflation in future years
- Extends emergency unemployment compensation (EUC) and extended benefits (EB) unemployment insurance program through January 1, 2014
- One year “doc fix” for Medicare payment physicians
- Extends existing agricultural programs for one year (preventing the “dairy cliff”)
- Postpones sequester by two months; will now occur on March 27, 2013 (same day as the continuing resolution expires)
- Permits 401(k) plan participants to convert their plan to a Roth plan, under which contributions are taxed going in but withdrawals are tax-free. The result is a short-term revenue boost now and more tax-free savings accounts.
- Ends 2 percent payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. cut; taxpayers should expect greater FICA withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. from their next paycheck.
- No action on the debt ceiling. The U.S. hit the debt ceiling on New Year’s Eve, although Treasury actions to juggle books and defer payments will forestall default until late February. Biden has reportedly pledged to liberal Democrats that the President will not negotiate over the debt ceiling.
Additionally, the House is considering a bill to cancel the scheduled congressional pay increase (from $174,000 to $174,900) and to continue the 2-year non-military federal employee pay freeze for another year. President Obama issued an executive order on December 27 to raise pay by 0.5 percent beginning April 2013.
UPDATE: There’s a rumor that the Senate bill has a “benefit recapture” provision, applying the 35% rate to all income for high-income individuals. This is not true. The alleged provision, on page 7 of the Senate bill, exists because the new 39.6% top rate is not in the tables where it ought to be, but in a different section. The provision thus states that the 35% rate applies to all taxable income from the dollar amount where the highest rate bracket begins for each filing category, up to the threshold for the 39.6% rate. It also clarifies that the 39.6% rate applies to taxable income. There is no provision stating that lower amounts of income are subject to the 35% rate. (They presumably have different rate tables because 10-15-25-28-33-35 rate bracket levels inflation-adjust from a different base year than the new 39.6% rate bracket level, which will inflation-adjust from 2013.)
| Table: 2013 Taxable Income Brackets and Rates Under H.R. 8 as Amended by Senate | |||
| Rate | Single Filers | Married Joint Filers | Head of Household Filers |
| 10% | >$0 | >$0 | >$0 |
| 15% | >$8,925 | >$17,850 | >$12,750 |
| 25% | >$36,250 | >$72,500 | >$48,600 |
| 28% | >$87,850 | >$146,400 | >$125,450 |
| 33% | >$183,250 | >$223,050 | >$203,150 |
| 35% | >$398,350 | >$398,350 | >$398,350 |
| 39.6% | >$400,000+ | >$450,000+ | >$425,000+ |
|
Table: Major U.S. Tax Provisions, 2001-2013 |
|||||||||
|
Tax Category |
2000 |
2001 |
2002 |
2003 |
2004-2005 |
2006-2007 |
2008-2009 |
2010-2012 |
2013* |
|
Income Tax Brackets |
— |
10% |
10% |
10% |
10% 39.6%** |
||||
|
Capital Gains Tax (max) |
20% |
16.7% |
15% |
23.8%*** |
|||||
|
Dividend Tax (max) |
39.6% |
39.1% |
38.6% |
15% |
23.8%*** |
||||
|
PEP & Pease |
Full |
Minus 1/3 |
Minus 2/3 |
Repealed |
Full**** |
||||
|
Joint Filer = 1.67 x Single |
Joint Filer = 2 x Single |
Joint Filer = 2 x Single |
|||||||
|
Child Tax Credit |
$500 |
$600 |
$1,000 |
$1,000 |
|||||
|
Source: Tax Foundation **Applies to taxable income over $400,000 (single), $425,000 (head of household), and $450,000 (joint filers) ***Capital gains tax and dividends tax will be 23.8 percent for taxpayers in the 39.6 percenttax bracket. This includes the 20 percent top tax rate and the new (for 2013) 3.8 percent health care tax on investment income on adjusted gross income over $200,000 (single) and $250,000 (joint filers). For lower income levels, the tax will be 0 percent, 15 percent, or 18.8 percent. ****Applies to tax filers with adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers). |
|
Table: Estate Tax Rates & Exemption Levels, 2000-2013 |
||
|
Estate tax (top rate) |
Estate tax exemption |
|
|
2000 |
55% |
$675,000 |
|
2001 |
55% |
|
|
2002 |
50% |
$1,000,000 |
|
2003 |
49% |
|
|
2004 |
48% |
$1,500,000 |
|
2005 |
47% |
|
|
2006 |
46% |
$2,000,000 |
|
2007 |
45% |
|
|
2008 |
||
|
2009 |
$3,500,000 |
|
|
2010 |
Repealed |
Repealed |
|
2010-2012 |
35% |
$5,120,000 |
|
2013* |
40% |
$5,120,000 |
|
Source: Tax Foundation; Internal Revenue Service. |