The good, bad and ugly of the American Taxpayer Relief Act
The federal budget and debt problems are a long way from being resolved, but we didnt go over the fiscal cliff. Thats due to the American Taxpayer Relief Act, the name given to the law which avoided the cliff, passed as it was on New Years Day, a national holiday. Significantly, theres no sequestration, a big deal for federal civil servants who otherwise would have been faced with job furloughs commencing this month. Dealers and other small business people also avoided the cliff insofar as current estate tax provisions remain substantially preserved and indexed for inflation. And, dealers should be pleased overall with the outcome on the estate tax and the Alternative Minimum Tax (AMT).
Highlights of the 100-plus-page bill passed on New Years Day are as follows:
Capital gains and dividends
Capital gains and dividends will be taxed at 20 percent (up from 15 percent) for individuals earning more than $400,000 and couples earning more than $450,000. The rate will remain at 15 percent for everyone else below the aforementioned thresholds. Without the bill, the 20 percent rate would have applied to all but the lowest-income taxpayers.
Alternative minimum tax
The bill increases the exemption amount for the AMT and permanently indexes it for inflation. The exemption for 2012 is $50,600 for single filers and $78,750 for married taxpayers filing jointly. These exemptions will increase for inflation in 2013. Relief from AMT for nonrefundable personal credits is retained. The AMT would have applied to many more taxpayers without this action.
The future of the AMT could be decided later this year or next year if Congress tackles comprehensive tax reform, according to CCH, a tax accounting and audit group. Some lawmakers have proposed abolishing the AMT. President Obama has in the past proposed replacing at least part of the AMT with the so-called Buffett Rule, under which taxpayers making more than $1 million in a year would pay an effective tax rate of at least 30 percent.
Estate and gift tax
The maximum estate tax rises to 40 percent (from 35 percent) and is permanently set at a $5 million per spouse exemption, indexed for inflation. The estate tax was almost a deal-breaker in the Senate, says CCH, because Republicans wanted complete repeal and President Obama wanted a 45 percent rate with a $3.5 million exemption. Without Congressional action, the tax would have risen to 55 percent with a $1 million exemption.
Bonus depreciation
The 50 percent bonus depreciation was extended for 2013. That should boost sales of business-use vehicles and help dealers buy equipment for their stores.
There was no grand bargain. Congress once again has left that for another day. But deadlines are looming: In February, lawmakers must discuss raising the nations debt limit, and both sides are girding for battle again. Sequestration, the drastic across-the-board spending cuts in federal programs, has been postponed, but only until March. Congress and the White House agreed to find $24 billion to pay for the two-month delay, so federal agencies are expecting cuts before March. No one knows how any of that might affect area car-purchase intentions.
The Payroll Tax Holiday
The payroll tax holiday ended December 31, 2012 and the employees portion of FICA withholding is now returned to 6.2 percent. The Medicare rate of 1.45 percent is unchanged as is the employers portion of both.
Interesting times, indeed.
[I]Thanks to the CCH Tax Briefing on the act, the Journal of Accountancy, NADA and the Washington Post for providing information for this article. No information here should be construed as tax advice. Check with your accountant for more details. [/I] Download Bulletin PDF