Key Provisions of H.R. 8: American Taxpayer Relief Act of 2012

(“Fiscal Cliff Agreement”)

SUMMARY:

The 112^th Congress was recently dubbed the “Do Nothing Congress” for the minimal amount of legislation enacted during the two-year session. Two hours after going over the Fiscal Cliff at midnight on January 1, the Senate voted 89-8, and the House of Representatives voted 257-167 to pass the American Taxpayer Relief Act of 2012 to reverse some of the measures which may have had a severe negative impact upon the economy.

The Congressional Budget Office projects the legislation will add $4 trillion to the U.S. deficit over the next 10 years compared to a scenario where the Bush tax cuts had been allowed to expire.

The Senate bill also sets up what is likely to be an even more heated fight in late February when the Treasury Department must come to Congress to seek an increase in the government's borrowing limit.

KEY PROVISIONS:

o   Tax rates will be allowed to rise on individual incomes over $400,000 per year, and household incomes over $450,000 per year to a maximum rate of 39.6%.

o   The tax on estates would rise to a 40% maximum rate, with a permanent exemption of $5 million, indexed for inflation. 

o   Permanently sets maximum long-term capital gain and dividend tax rates at 20% for households making more than $450,000.

o   Phases out itemized deductions and personal exemptions for those making more than $250,000, $300,000 joint.

o   Permanently sets maximum long-term capital gain and dividend tax rates at 15% for households making less than $450,000.

o   The 2% temporary decrease in FICA payroll taxes relief was allowed to expire. This provision has a disproportionate impact on those making less than $113,700 (the FICA limit in 2013). This is expected to take $125 billion out of consumer income.

o   Extends the tuition tax credit and child and dependent care tax credits for five years.

o   Workers will be allowed to rollover 401k funds to a Roth IRA while still actively participating in a 401k plan. Think of it as an ‘In-Service’ distribution.

·        Pay income tax currently.

·        Not subject to Required Minimum Distributions at age 70½.

·        Future earnings are tax-free.

o   Permanent adoption of the Alternative Minimum Tax exemption amounts. Impacts 32 million Americans who may have been subjected to AMT in 2012 and indexes AMT for inflation.

o   Postpones $109 billion sequester for two months.

o   Extends unemployment insurance for two million long-term unemployed Americans.

o   Extension of the 2008 Farm Bill through the end of this fiscal year (September 30, 2013). Keeps the price of milk from potentially doubling.

o   Prevents a 27% reduction in Medicare payments to doctors and other health care providers treating patients on Medicare.

* We do not provide tax advice or services.  Please consult your tax advisor regarding your specific situation.

* The above material was prepared by Peak Advisor Alliance. (approval #1-129110)

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC.

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