Dollars & Sense: What fiscal cliff agreement means to you
David L. Blaydes dblaydes@rpi-online.com January 24, 2013 12:52PM
David L. Blaydes, CFP, MS, is President of Retirement Planners International of Naperville. Anyone with financial questions can contact David at dblaydes@rpi-online.com, or 630-778-8100. | submitted
Updated: February 28, 2013 6:37AM
The 112th Congress recently was 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 Jan. 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 that might have had a severe negative impact on the economy.
The Congressional budget office projects the legislation will add $4 trillion to the U.S. deficit during the next 10 years compared to a scenario where the Bush tax cuts had been allowed to expire.
The Senate bill also set up what was likely to be a heated fight in February about the debt limit. But a bill passed Wednesday will avert that crisis, allowing government borrowing through May 18. That means a spring debate will ensue about borrowing, taxes and spending.
Key provisions:
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 percent.
The tax on estates would rise to a 40 percent maximum rate, with a permanent exemption of $5 million, indexed for inflation.
Permanently sets maximum long-term capital gain and dividend tax rates at 20 percent for households making more than $450,000.
Phases out itemized deductions and personal exemptions for those making more than $250,000, $300,000 joint.
Permanently sets maximum long-term capital gain and dividend tax rates at 15 percent for households making less than $450,000.
The 2 percent 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.
Extends the tuition tax credit, and child and dependent care tax credits for five years.
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.
To qualify for the tax-free penalty-free withdrawal earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ for a qualified distribution.
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.
Postpones $109 billion sequester for two months.
Extends unemployment insurance for 2 million long-term unemployed Americans.
Extension of the 2008 Farm Bill through the end of this fiscal year (Sept. 30). Keeps the price of milk from potentially doubling.
Prevents a 27 percent reduction in Medicare payments to doctors and other health-care providers treating patients on Medicare.
David L. Blaydes is president of Retirement Planners International of Naperville. Anyone with financial questions can contact him at dblaydes@rpi-online.com, or 630-778-8100, ext. 100. This column is provided for information purposes and prepared in conjunction with Peak Advisor Alliance. Seek the opinion of your tax adviser regarding your personal tax advice/services situation.
