In Archived

We survived the Mayan’s “end of the world” on December 21st and today we live to tell the tale of surviving the Fiscal Cliff.  The Biden-McConnell compromise locks in $620 billion in revenue over the next ten years, but still leaves many unanswered questions.  As of today, this is what we do know.
Income Tax Cuts: The Bush-era income tax rates will be permanently extended for incomes up to $400,000 for singles, $450,000 for married couples (now considered “high income earners”).  Households above these thresholds will see their top rates rise to 39.6%, up from 35% in 2012.

Capital Gains & Dividends: Capital gains and dividend tax rates increase from 15% to 20% for “high income earners”.  Per the Affordable Care act there is an additional surcharge of 3.8% on capital gains and dividends beginning in 2013.  For everyone else, investment tax rates will remain at 15% or below.

AMT: The bill makes permanent the inflation adjustment for the income exemption levels for the Alternative Minimum Tax, retroactive to 2012.

Estate tax: The legislation will preserve the current estate tax exemption level of $5.12 million but index it to inflation for future years. Top estate tax rate rose to 40%.

“Pease” provision reinstated: The reinstatement of the Pease provision eliminates up to 80% of deductions for those households making $250,000 (married couples making $300,000).  The provision affects all deductions, including charitable donations and mortgage interest, limiting the benefit of these significant tax deductions for many.

Personal Exemptions: The personal exemption that was $3,800 per person for most individuals in 2012 will phase out for couples with $300,000 or more of adjusted gross income, or singles with $250,000.

Payroll tax increase:  There has been no change to the planned payroll tax increase.  For all households, the payroll tax this year will increase by two percentage points, to 6.2 percent from 4.2 percent, on all earned income up to $113,700.

Long-term unemployment benefits: The federal extension of emergency unemployment benefits have been extended for another year.

Business tax incentives:  Several tax breaks for businesses, including a production tax credit for developers of wind projects, and the research and development tax credit and a 50% bonus depreciation are extended through 2013.

Expired tax breaks for individuals: Extension for one or two years a few “temporary” tax breaks for individuals that regularly are extended. These include an option to deduct state and local sales taxes in place of state and local income taxes; and a deduction for elementary and secondary school teachers for certain expenses.

Tax Credits: The bill extends The American Opportunity Tax Credit, the Child Tax Credit and Earned Income Tax Credit for 5 more years.

Medicare doctors’ pay: Prevented a scheduled cut of 27% in reimbursement for Medicare services for one year.

Sequester: The sequester is delayed for two months.

For those investors in the highest income tax brackets, the implications of this bill are significant.  Stock markets are up today – a likely short-term reaction to a potential crisis averted.  It is important to keep in mind that there are still many unanswered questions remaining to be resolved in 2013 and the difficult discussions regarding the debt-ceiling and structural changes to entitlement programs and other government spending will surely cause additional political drama in the months ahead.

We will continue to keep you informed of the important facts and how they may affect you.  Even more importantly, we will continue to remain focused on the financial goals that are important to you as we evaluate investment opportunities and manage your portfolios.

We wish you a happy New Year and we are grateful to share the good news that affordable milk has been protected for the time being – the farm bill was extended through the end of 2013.

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