Now that the standoff over the so-called "fiscal cliff" between President Obama and the House Republicans has been resolved, some of you may be wondering what it means to you. If you are among the huddled masses trying to make sense of it, I have some good news: We have some tax advice courtesy of Houston-based UHY Advisors and also from Zaim Hajdari, president of The Hajdari Group, a New York City-based wealth manager.
UHY Advisors says the 154-page American Taxpayer Relief Act of 2012 did much more than extend the 2001-2003 Bush tax cuts. It also changed or extended tax laws in more than two dozen additional areas. Among these are itemized deductions, personal exemptions, the marriage penalty, estate and gift taxes, capital gains and dividend rates, tax credits, the alternative minimum tax, non-refundable credits, education incentives, gains on small business stock, and other individual provisions.
For businesses, there are changes in depreciation, research and development, tax credits, S-corporation built-in gains, and charitable donations of property.
Energy-related changes were made with regard to energy-efficient homes credit, alternative fuel and electric vehicles, biofuels, biodiesel and renewable diesel fuels, American Indian coal facilities, renewable energy tax credits, energy-efficient appliances, electric utility restructuring, and alternative fuels excise tax credits.
The biggest changes created by the fiscal-cliff fix will hit high-net-worth individuals. Single taxpayers earning $400,000 and up and couples earning $450,000 and up will see their tax rates climb from 35% to 39.6%. This same group will also see an increase in taxes on capital gains and dividends to 20%.
Estates for the wealthy also take a hit, says wealth manager Hajdari. Although the estate tax exemption will remain at $5 million for individuals and adjust for inflation, the top tax rate itself goes up from 35% to 40%. There was discussion of changing the $5 million threshold to $3.5 million or even lower, but this was not changed in the final bill that passed.
Some changes affect more modest earners as well, says Hajdari. The Social Security tax holiday is over. The 4.2% rate is now back up to 6.2%. However, the middle class had faced a future with the dreaded alternative minimum tax, originally aimed at taxing the wealthy but recently affecting a growing segment of middle-income taxpayers. The AMT is now permanently indexed to inflation, helping to ensure it hits only the wealthy.
Finally, married couples in all brackets will see a permanent end to the so-called "marriage penalty."
Receiving less attention, but still able to affect the bottom line for taxpayers, are a host of other features in the fiscal cliff deal. For the unemployed, the deal provides a one-year extension of emergency unemployment benefits. And physicians will see a postponement of automatic cuts in Medicare payments.
Commuters may see a change in benefits also. Buried in the deal is a provision to extend parity between the exclusion from income for employer-provided mass transit and parking benefits. This can mean that pre-tax mass transit benefits become equal to pre-tax parking benefits.
For those inclined toward philanthropy, the fiscal cliff bill extends the ability to make tax-free distributions from IRAs to charities.
These provisions, and dozens of others we can't cover in this short space, mean that all taxpayers, especially those with a high net worth, will have to take a fresh look at their financial plans and their estate plans.
IPAA relieved at fiscal cliff deal
The Independent Petroleum Association of America issued a statement on Jan. 10 saying the oil and gas industry's tax provisions "remain intact" in the fiscal cliff deal. "The tax provisions critical to independent producers were not targeted or cut in the final agreements to avert the fiscal cliff," says the organization.
Over the past year, IPAA chairman Gigi Lazenby and president and CEO Barry Russell, along with the organization's government relations staff in Washington have been hard at work, visiting top legislators and their staff in Congress to discuss the importance of allowing intangible drilling costs and percentage depletion to remain intact.
With that particular threat averted, the industry's tax structure will remain a target in the new Congress as comprehensive tax reform was not settled in the last session. IPAA has been working with all the other national oil and natural gas trade associations to present a united front in Washington. The organization's government relations staff has already been meeting with and reaching out to the new members of Congress, reviewing the basic upstream operating structure of the industry, and explaining how new taxes on energy production will inevitably result in less energy and fewer jobs.