CCH Tax BriefingPost-Election Tax PolicyNovember 8, 2012                                                                  ...
2012 Post-Election Tax Policy2       sales/acquisitions, and executing family           Reauthorization and Job Creation A...
November 8, 2012                                                                                                          ...
2012 Post-Election Tax Policy4     not pay a smaller effective rate of income          minimum earned income amount used t...
November 8, 2012                                                                                                          ...
2012 Post-Election Tax Policy6       the first-time homebuyer credit for the         Selected individual extenders on the ...
November 8, 2012                                                                                                          ...
2012 Post-Election Tax Policy8     instruments or commodities; and net gain             COMMENT. For AMT purposes the     ...
November 8, 2012                                                                                                          ...
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Post Election Tax Policy


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Post Election Tax Policy

  1. 1. CCH Tax BriefingPost-Election Tax PolicyNovember 8, 2012 Special Report Highlights Obama Wins Second Term; Agreement Rate Increases For Higher On Taxes/Spending Possible By Year-End P Brackets On Horizon resident Obama secured a second step toward deficit reduction with revenue Certain Itemized Deductions term in office November 6, 2012, raisers within four to six months. In the in the end winning the Electoral interim, both sides may have to settle for a Likely To Be Curtailed College by a wide margin. The President’s temporary extension of some of the expiring Fiscal Cliff To Force re-election now sets in motion what will provisions, including some income tax rates, Congressional Action likely be difficult negotiations between and leave the long-term fate of the Bush-era Democrats and Republicans over the fate of tax cuts and more to the 113th Congress, Permanent AMT Solution the Bush-era tax cuts, nearly $100 billion which will meet in January 2013. May Be Found in automatic spending cuts, and the more than 50 expiring tax extenders, which in- COMMENT. Less than 24 hours after Enhanced Business clude the alternative minimum tax (AMT) the results were in, House Speaker John Expensing Up For Renewal patch for tens of millions of taxpayers. The Boehner, R-Ohio, said Democrats and President’s re-election has also significantly Republicans should focus on “common Education Tax Breaks Likely changed the dynamics for reaching an even- ground” to address the so-called “fiscal Preserved tual agreement over long-term tax reform. cliff.” Lawmakers are due back in Wash- ington on November 13. They will break Many Affordable Care Act IMPACT. Year-end tax strategies will de- for Thanksgiving later in November and Provisions Set To Go mand more urgent attention from higher- will return in early December. Although income taxpayers as the result of President the scheduled work period is short, there Corporate Tax Reform To Obama’s re-election. The President has con- have been reports of lawmakers engaging Become Priority sistently called for higher tax rates on indi- in behind-the-scenes discussions about viduals with incomes above $200,000 and taxes and deficit reduction in the weeks families with incomes above $250,000 and before the election. These discussions continuation of the current lower tax rates could help kick-start serious negotiations for others. He campaigned on reinstatement between the White House and the GOP. Inside of the 36 percent and 39.6 percent incomePost-Election Congress.......................... 2 tax rates for higher-income individuals. COMMENT. Whether any eventual com- The President also advocated a maximum promise hammered out between CongressLooming Deadlines................................ 2 capital gains rate increase from 15 percent and the Obama Administration wouldIndividuals................................................ 2 to 20 percent and a dividend rate rise from extend lower income tax and capitalEstate and Gift Tax................................. 4 15 percent to 36 percent or 39.6 percent gains/dividends rates for one more year,Payroll Tax Holiday................................. 4 for higher-income taxpayers. His re-election into 2013, or allow the higher top rates also ensures that the 3.8 percent Medicare in 2013 to start at temporarily higherBusinesses................................................ 4 contribution surtax on net investment in- income levels than initially proposed,Tax Extenders.......................................... 5 come will go into effect on January 1, 2013, remains speculative. In the meantime,Education................................................. 6 and continue into the foreseeable future. higher-income taxpayers must decideHealth Care.............................................. 7 whether to wait-and-see … or secure the Before the election, President Obama had benefit of current rates now, through ac-Possible Blueprints for Tax Reform..... 8 predicted Democrats and the GOP could celerating income, postponing deductions/ reach a “grand bargain” that permanently re- credits, harvesting appreciation/capital solves the fate of the Bush-era tax cuts, low- gains, having closely-held corporations ers the corporate tax rate and takes a serious declare special dividends, closing business
  2. 2. 2012 Post-Election Tax Policy2 sales/acquisitions, and executing family Reauthorization and Job Creation Act expiring extenders in the lame-duck ses- gift-giving strategies—all before year end of 2010, expire; sion. The IRS maintains that it cannot 2012. While it is not absolutely certain Across-the-board spending cuts take effect wait much longer to issue 2012 tax year that tax rates will rise in 2013, it is more under the Budget Control Act of 2011; forms without delaying the start of the than certain that rates will never drop The employee-side payroll tax holiday 2013 filing season. Meanwhile, if the law lower than they are now in 2012 for most ends; isn’t changed, the Congressional Budget higher-income taxpayers. More tax extenders expire, joining the Office estimates that over 20 million ad- ranks of extenders that expired after 2011. ditional middle-income taxpayers will become subject to the AMT without the POST-ELECTION CONGRESS so-called “AMT patch” for 2012. With 2012-focused tax legislation, however, Winning the White House does not neces- “The President’s there is also speculation that Congress sarily create a mandate for the President to re-election now sets in may buy itself some time by enacting a push through his full agenda. Nevertheless, three-month extension of Bush-era tax President Obama’s power to veto legislation motion what will likely cuts (to be pro-rated over 2013). An ex- for four more years will clearly shape up- be difficult negotiations tension of some sort may be necessary be- coming negotiations. Moreover, the 113th cause without it, wage withholding at the Congress retains its familiar profile of a Re- between Democrats and higher tax rates would become manda- publican majority in the House and Demo- Republicans over the tory for all taxpayers at all income levels. cratic majority in the Senate (but, as before, without the 60 vote margin to prevent fili- fate of the Bush-era tax Payroll tax holiday. Take home pay will buster). Membership on the Congressional cuts, nearly $100 billion also be immediately reduced if Congress tax writing committees for the most part also does not extend the employee-side payroll remains the same after the elections as before. in automatic spending tax holiday, or enact some replacement Compromise on issues that have been de- cuts, and the more than for it. The employee-share of OASDI is bated throughout this past year—over both scheduled to return to 6.2 percent instead what is fair and what a still-fragile economy 50 expiring tax extenders, of 4.2 percent (up to the 2013 Social Se- can withstand— may be necessary on both which include the curity wage base of $113,700). Proponents sides of the aisle and in the White House be- of an extension maintain that the economy fore any tax legislation can move forward. alternative minimum tax cannot take the hit on consumer spending (AMT) patch for tens of that would result from a sunset of the pay- COMMENT. In summer 2012, the roll tax holiday; opponents argue that it is GOP-controlled House and the Demo- millions of taxpayers.” temporary tax relief that the nation can no cratic-controlled Senate approved com- longer afford. peting bills to extend some of the Bush- era tax cuts. The House also approved a Unlike 2010, when the Bush-era tax rates fiscal year (FY) 2013 budget resolution, were extended for two years, any extension INDIVIDUALS which would consolidate the current six of the Bush-era tax rates will most likely individual income tax rates to two (10 be accompanied by deficit reduction mea- President Obama campaigned on a promise and 25 percent), repeal the alternative sures. The extent of those deficit reduction to extend the Bush-era tax cuts for lower and minimum tax (AMT) and reduce the measures is unclear at this time. Among the moderate income individuals, but to allow corporate tax rate to 25 percent. Neither likely potential revenue raisers are increased them to expire for higher-income individu- the House nor Senate has approved any taxes on higher-income individuals, accom- als. The President is not expected to change legislation to extend the 2012 employee- plished through higher marginal rates and his position after the election, but there side payroll tax holiday for one more year. the elimination or curtailment of certain tax could be some compromises on the income preferences. Tax preferences that might be thresholds that trigger the higher rates. targeted for repeal would most likely include LOOMING DEADLINES those impacting business taxpayers, such as Income Tax Rates certain oil and gas tax breaks and the last-in- Effective January 1, 2013: first out (LIFO) method of accounting. If Congress approves the President’s propos- al, the individual income tax rates would be: The Bush-era tax cuts, extended by the One scenario calls for Congress approv- 10, 15, 25, 28, 33, 36, and 39.6 percent for Tax Relief, Unemployment Insurance ing an AMT patch and other popular 2013 and subsequent years. Alternatively, CCH Tax Briefing ©2012 CCH. All Rights Reserved.
  3. 3. November 8, 2012 3Congress could extend all of the Bush-era IMPACT. As part of the automatic sun- over $200,000 and married taxpayers filingtax rates through 2013 or, in a deadlock, set of Bush-era tax benefits, after 2012 a joint return with incomes over $250,000.take no action and allow the Bush-era tax higher-income taxpayers also would once Regarding dividends, single individualsrates to sunset. Full sunset for lower and again be subject to the Personal Exemp- with incomes over $200,000 and familiesmiddle-income taxpayers—which would tion Phaseout (PEP) and the Pease Limi- with incomes over $250,000 would pay taxreinstate a 15, 28, 31, 36 and 39.6 percent tation on itemized deductions (named for on their dividends as ordinary income.bracket structure—is highly unlikely from a the member of Congress who sponsoredpolitical and economic standpoint. the legislation). Alternatively, President IMPACT. For dividends, the increase Obama has proposed replacement of the in tax rate for higher-income taxpayers IMPACT. Under President Obama’s pro- PEP and Pease Limitation with a limit represents almost a 300 percent increase posal, the 36 and 39.6-percent rates would on the value of itemized deductions for when a top 39.6 percent rate is combined start at a higher-income bracket level of higher-income taxpayers. The President with the new 3.8 percent Medicare con- $200,000 for single filers, $250,000 for would limit the value of otherwise allow- tributions tax on net investment income joint filers, $225,000 for head-of-house- able deductions to 28 percent of AGI for (NII). Combined with a jump in the holds, and $125,000 for married taxpay- those in his proposed 36 and 39.6 percent capital gains rate from 15 percent to 20 ers filing separately. Since these thresholds tax brackets. percent (23.8 percent with the NII tax), were initially proposed in 2009, they some economists are predicting a massive would also be indexed for inflation. Also During the campaign, the President said market sell-off at year end as taxpayers they would be keyed to adjusted gross in- he saw no way to accommodate Governor engage in basis-resetting strategies and come (AGI) rather than taxable income. Mitt Romney’s plan to reduce the individ- reallocation of portfolio assets. To cre- Indexed 2013 projections for those AGI ual income tax rates by 20 percent across ate a softer landing, one proposal would levels, based on the Administration’s FY the board in exchange for a reduction in the raise rates for taxpayers only with incomes 2013 Budget, are $213,200 / $266,500 number of deductions and loopholes cur- above $1 million, at least for the 2013 / $239,850 / and $133,250, respectively. rently available. Obama maintained that he period until a more permanent structure would not support a proposal in which “the under the umbrella of tax reform couldFor a married couple filing a joint return, numbers don’t add up.” be enacted.the tax brackets under President Obama’splan would be: COMMENT. The IRS has delayed issu- COMMENT. Under current law, taxpay- ing some 2013 inflation adjustments, in- ers in the 10 and 15 percent income taxTax Rate 2013 Taxable Income cluding those affecting tax rate brackets, brackets pay zero percent tax on qualified10% $0–$17,850 pending action by Congress. The IRS is capital gains and dividends.15% $17,850–$72,500* expected to move quickly to release these inflation adjusted amounts as soon as leg-25% $72,500–$146,400 islation is passed by Congress and signed Alternative Minimum Tax28% $146,400–$223,050 by the President. If the alternative minimum tax (AMT) ex-33% $223,050–$266,400 emption amounts are not patched for 2012,36% $266,400–$398,350 they would be dramatically less than the ex- Capital Gains/Dividends emption amounts for 2011. Under current39.6% $398,350+ President Obama campaigned on allowing law, the AMT exemption amounts for 2012* Also assumes continuation of marriage penalty relief the Bush-era tax cuts—including the re- are $33,750 for single individuals, $45,000 duced capital gains and dividend tax rates— for married couples filing joint returns andFor a single individual, the tax rates under to expire for higher income individuals, and surviving spouses, and $22,500 for mar-President Obama’s plan would be: he is not expected to change his position ried couples filing separate returns. In com- now. Under the President’s proposal, the parison, the AMT exemption amounts forTax Rate 2013 Taxable Income current zero and 15 percent capital gains 2011 were $48,450 for single individuals,10% $0–$8,925 and dividend tax rates would be extended $74,450 for married couples filing joint re-15% $8,925–$36,250 after 2012 for single individuals with in- turns and surviving spouses, and $37,22525% $36,250–$87,850 comes below $200,000 and families with for married couples filing separate returns. incomes below $250,000.28% $87,850–$183,250 In early 2012, President Obama proposed33% $183,250–$213,200 The President’s proposal would increase replacing at least a portion of the AMT with36% $213,200–$398,350 the tax rate on qualified capital gains to 20 the so-called “Buffett Rule,” essentially the39.6% $398,350+ percent for single individuals with incomes principle that millionaire taxpayers should CCH Tax Briefing
  4. 4. 2012 Post-Election Tax Policy4 not pay a smaller effective rate of income minimum earned income amount used to COMMENT. President Obama has also tax than middle-class families. Although calculate the additional child tax credit to proposed to extend the generation skip- the Senate voted on a version of the Buffett $3,000. President Obama has proposed to ping transfer (GST) taxes at parameters Rule, the proposal was never taken up by make permanent the $3,000 threshold. in effect for calendar year 2009. the House. COMMENT. The 2010 Tax Relief Act In announcing the Buffett Rule, President ESTATE AND GIFT TAX also provided for portability, which in- Obama asked Congress to pass measures creases the surviving spouse’s lifetime ex- that ensure individuals making over $1 mil- Few provisions in the Tax Code have been clusion for estate and gift taxes by the por- lion a year pay a minimum effective tax rate as uncertain in their long-term fate as the tion of the deceased spouse’s exclusion that of at least 30 percent. The Senate approved federal estate tax. In 2001, Congress set in is unused at the deceased spouse’s death. the legislation that would subject taxpay- motion a gradual reduction of the federal Portability is scheduled to sunset after ers earning over $2 million to a 30 percent estate tax rate and repealed it for estates of 2012. President Obama has proposed to minimum federal tax rate. The tax would be decedents dying in calendar year 2010. extend portability. phased in for individuals with incomes be- tween $1 million and $2 million, with those Under the 2010 Tax Relief Act, federal es- taxpayers paying a portion of the extra tax tate taxes again applied to estates of dece- PAYROLL TAX HOLIDAY required to get them to a 30 percent effec- dents dying after December 31, 2009, and tive tax rate. before January 1, 2013 (although estates of The payroll tax holiday reduced the em- decedents dying in calendar year 2010 could ployee-share of Old Age, Survivors and IMPACT. The need for an AMT patch ret- opt out of the federal estate tax and apply a Disability Insurance (OASDI) taxes from roactive to the start of 2012 may force the modified carryover basis regime). President 6.2 percent to 4.2 percent for calendar year lame-duck Congress to consider at least a Obama has proposed extending the federal 2012 up to the Social Security wage base small tax bill before 2013 in order to give estate and gift tax under parameters in ef- of $110,100. The wage base for 2013 will the IRS time to finalize 2012 tax forms and fect for calendar year 2009 for estates of rise to $113,700. Self-employed individuals start the 2013 tax return season on time. decedents dying after December 31, 2012. benefit from a comparable rate reduction That level would set the estate tax exclusion for calendar year 2012. COMMENT. Proposals for replacing or at $3.5 million with a 45 percent rate and repealing the AMT appear to be made the gift tax lifetime exclusion of $1 million. IMPACT. A two percent payroll tax cut in as long-term solutions. The AMT brings 2013 would amount to $2,274 in sav- in a considerable amount of revenue and IMPACT. Absent Congressional action, the ings for all wage earners at or above the cannot be easily replaced. A tax on mil- maximum estate tax rate is scheduled to $113,700 wage base. lionaires may not bridge that revenue be 55 percent for estates of decedents dying gap. A solution that is rolled up into the after 2012 with a $1 million combined On the campaign trail, President Obama umbrella of overall tax reform appears to estate and gift tax exclusion amount. Op- did not specifically call for extending the be one focal point for tax policy now be- ponents of the estate tax continue to main- payroll tax holiday for another year. How- ing pursued. tain that it hurts family-owned businesses ever, some Democratic leaders in Con- to the detriment of the economy. gress have said that the payroll tax holiday should be extended. It is unclear at this Child Tax Credit IMPACT. For 2012, a unified estate time if President Obama will push for After 2012, the $1,000 child tax credit is and gift tax exclusion stands at $5.120 an extension of the payroll tax cut, or an scheduled to revert to $500 per qualifying million, with a 35 percent rate imposed equivalent substitute, as part of a year-end child. President Obama campaigned on the on the excess. The exclusion effectively tax package. promise to make permanent the $1,000 becomes $10.24 million for married child tax credit and is expected to support couples. Depending upon a wealthy indi- legislation that will do so. vidual’s estate plan and the type of assets BUSINESSES held, some practitioners recommend mak- COMMENT. Taxpayers who cannot take ing large gifts before 2013 to take advan- On the campaign trail, President Obama full advantage of the child tax credit be- tage of the $5.12 million/$10.24 million called for a reduction in the corporate tax cause the credit is more than the taxes amounts that may be transferred gift-tax rate. Such a reduction has broad bipartisan they owe may receive a payment for some free before 2013. The re-election of Presi- support, although there remains disagree- or all of the credit not used to offset their dent Obama makes the repeal of the es- ment over the proper tax rate and the spe- taxes. The 2010 Tax Relief Act reduced the tate tax or a higher exclusion unlikely. cific revenue offsets that would be used to CCH Tax Briefing ©2012 CCH. All Rights Reserved.
  5. 5. November 8, 2012 5broaden the tax base. However, because there 2013 appears possible. Earlier this year, IMPACT. Before his re-election Presidentis consensus that a reduction in corporate in- the Senate approved legislation to provide Obama called for extension of the highercome tax rates would be good for business for a Code Sec. 179 maximum dollar education tuition deduction, AMT reliefand good for the country, Congress is expect- amount of $250,000 and an $800,000 (the AMT “patch”), the enhanced Worked to enact corporate tax reform, although it investment limitation for tax years be- Opportunity Tax Credit (WOTC) formay take until late 2013 or 2014 to do so. ginning after December 31, 2012. The veterans, and the production tax credit House approved legislation to extend the for wind energy projects, among other Code Sec. 179 small business expens- extenders. Now that he has been re-elect-Corporate Tax Rate ing parameters originally put in place ed, there is nothing to indicate that thePresident Obama has said that any cut in in 2003 ($100,000 and $400,000, re- President will withdraw his support forthe corporate tax rate must be revenue neu- spectively) through 2013. These amounts extending these provisions. The questiontral. That means certain business tax prefer- would be indexed for inflation for 2013, is: will lawmakers go along with the Pres-ences are likely to be eliminated in exchange which the House GOP estimated at ident’s proposals and when will they act?for the reduction. President Obama has $127,000 and $510,000, respectively.repeatedly urged elimination of tax prefer- Disincentives to passing an expensing ex- IMPACT. Democrats and Republicansences for oil and gas producers, which could tension include its cost and what offsets generally agree that the longer they waitbe used to partly offset the cost of a corpo- may be used. to extend some or all of the extenders,rate tax cut. the greater the likelihood of a delayed 2013 filing season. The IRS is preparing COMMENT. In early 2012, President Bonus Depreciation to process 2012 returns under the tax Obama unveiled a Framework for Busi- Bonus depreciation at its current 50 percent law as it now reads. The IRS will need ness Tax Reform in which he proposed rate is scheduled to expire after 2012 (after time to adjust its processing systems for reducing the maximum corporate tax 2013 for certain transportation property late legislation. rate from 35 percent to 28 percent, with and longer-lived property). It is unclear if a reduced effective rate of 25 percent for President Obama will support an extension COMMENT. In past years, the tax extend- qualified manufacturers. of 50 percent bonus depreciation. ers were routinely approved by Congress, either at year-end or early in the subse- COMMENT. Any discussions for a grand quent year and made retroactive. This bargain could include moving the U.S. TAX EXTENDERS year may be different. Some lawmakers from a worldwide system of taxation to have balked at the estimated $200 bil- a territorial system of taxation, but this Linked to the Bush-era tax cuts are a pack- lion cost over 10 years of extending all of is unlikely to be a priority. On the other age of so-called tax extenders. These are these tax benefits. However, it is unclear hand, proposals made by the President popular but temporary tax incentives. which extenders, if any, would be allowed in early 2012 to reward employers that Many of the tax extenders were effective to expire. In August, the Senate Finance move operations from overseas plants to only through 2011 but may be retroactively Committee (SFC) approved the Middle the U.S. with a tax credit could be re- extended for the entire 2012 tax year by the Class Tax Relief Act of 2012, which did vived. President Obama also proposed to lame-duck Congress. Others were extended not renew some of the tax extenders (such give employers that increase payrolls a tax through 2012. as brownfields remediation expensing and credit. This proposal also could be revived in year-end negotiations.Small Business Expensing SOME TAXES GOING UP?Enhanced Code Sec. 179 expensing is sched- During his campaign, President Obama noted that it would be impossible for theuled to expire after 2012. Unless extended, government to reduce its deficit without bringing in additional revenue and that ad-the current expensing amount of $139,000 ditional taxes are necessary:(as indexed for inflation) is scheduled to fallto $25,000 and the current $560,000 in- “We’ve identified tax rates going up to the Clinton [pre-2001] rates for income abovevestment limit (as indexed for inflation) is $250,000; making some adjustments in terms of the corporate tax side that couldscheduled to fall to $125,000. actually bring down the corporate tax overall, but broaden the base and close some loopholes. That would be good for our economy, and it would be good for reducing COMMENT. Some compromise over ex- our deficit.” tending expensing at a higher level into CCH Tax Briefing
  6. 6. 2012 Post-Election Tax Policy6 the first-time homebuyer credit for the Selected individual extenders on the fence Selected business extenders on the fence include: District of Columbia); but these extend- include: ers could be added back before the passage Production tax credit for wind energy of a final bill. Deduction for qualified mortgage insur- projects ance premiums Employer credit for activated military COMMENT. The tax extenders may also Code Sec. 25C residential energy prop- reservists be held up by legislation unrelated to erty credit Seven-year recovery period for motors- taxes. Some lawmakers are upset that ports complexes Congress recessed before the November COMMENT. The Code Sec. 25D residen- Railroad track maintenance credit elections without passing a farm bill tial energy efficient property credit is avail- Brownfields remediation and drought disaster relief. They have able for qualified property placed in service Credit for energy efficient homes promised not to move on the extenders before January 1, 2017. Qualified property or other legislation until Congress acts includes certain geothermal energy property COMMENT. During the campaign, on a farm bill. and small wind energy property. President Obama called for extension of the production tax credit for wind energy projects, which is scheduled to expire af- Individual Extenders Business Extenders ter 2012 (and after subsequent years for The individual tax extenders can be divided Like the individual extenders, the business other projects). However, extension of the into two categories: Extenders that are good extenders can be divided into two groups: production tax credit faces significant candidates for renewal and extenders that good candidates for renewal and extenders hurdles in the GOP-controlled House. are on the fence. This assessment is based on the fence. upon both the support, or lack thereof, COMMENT. Brownfields remediation that the Obama Administration has given Likely to be renewed expensing and the credit for energy ef- to each and how receptive members of the ficient homes were two incentives not Congressional tax writing committees have Business extenders likely to be renewed included in the SFC’s Middle Class Tax been to each. include: Cut Relief Act of 2012. Likely to be renewed Code Sec. 41 research tax credit Code Sec. 179 small business expensing EDUCATION Individual extenders with a strong likeli- Work Opportunity Tax Credit (WOTC) hood of renewal are: 15-year recovery for qualified leasehold President Obama emphasized during his improvements, restaurant property and campaign the need to continue improving Higher education tuition deduction retail improvements education across the nation. The thrust of State and local sales tax deduction New Markets Tax Credit the Obama Administration’s tax incentives Teachers’ classroom expense deduction for education during his first term has fo- Qualified charitable distributions from COMMENT. The research tax credit, which cused on higher education and job retrain- IRAs expired after 2011, enjoys strong bipartisan ing programs. The President, however, also support in Congress, with many lawmakers does not want Congress to curtail certain IMPACT. No one can predict what Con- and the White House calling for a perma- funding of public education, a spending- gress will ultimately do but the higher edu- nent credit. The research tax credit is likely side issue that may be considered in nego- cation tuition deduction, the state and local to be extended for one year (through 2012) tiating the extension of current tax breaks. sales tax deduction, the teachers’ classroom or two years (through 2013). In addition to supporting renewal of the expense deduction, and charitable distribu- above-the-line higher education tuition de- tions from IRAs appear to enjoy strong sup- COMMENT. Under current law, em- duction, the following education tax breaks port for extension. These incentives could be ployers can take advantage of an are currently also up for renewal: extended for one year (through 2012) or for enhanced WOTC for hiring quali- two years (through 2013). fied military veterans. The enhanced WOTC for veterans is scheduled to ex- American Opportunity Tax Credit COMMENT. In September, a bipartisan pire after 2012 but is a good candidate President Obama campaigned on making per- group of about 60 House members from for renewal. However, it is unclear at manent the temporary American Opportuni- states without an income tax called for this time if the WOTC for other target ty Tax Credit (AOTC). The AOTC, which is extension of the state and local sales tax groups, which expired after 2011, will an enhanced version of the HOPE education deduction. be extended. credit, is scheduled to expire after 2012. CCH Tax Briefing ©2012 CCH. All Rights Reserved.
  7. 7. November 8, 2012 7 IMPACT. The AOTC applies to 100 per- New tax on medical devices (2013) agencies responsible for implementing cent of the first $2,000 of qualified tu- State health insurance exchanges (2014) the Affordable Care Act. ition and related expenses and 25 percent Individual shared responsibility pay- of the next $2,000, for a total maximum ments (the individual mandate) (2014) COMMENT. The U.S. Supreme Court credit of $2,500 per eligible student. Ad- Employer shared responsibility pay- upheld the Affordable Care Act’s indi- ditionally, the AOTC applies to the first ments (2014) vidual insurance mandate in NFIB v. Se- four years of a student’s post-secondary ed- Premium assistance tax credit (2014) belius, 2012-2 ustc ¶50,573. However, ucation. The AOTC also allows for par- No annual dollar limits on health insur- opponents argue that the employer’s shared tial refundability for qualified taxpayers. ance coverage (2014) responsibility payment was not addressed Increase in small employer health insur- by the Court in NFIB v. Sebelius. Some COMMENT. If the AOTC expires, it will ance tax credit (2014) taxpayers have also challenged the Afford- be replaced by the traditional HOPE New tax on “Cadillac” health insurance able Care Act’s contraceptive provisions. education tax credit. plans (2018) Medicare Contribution TaxCoverdell ESAs The Affordable Care Act imposes a 3.8 per-After 2012, the $2,000 annual contribution “President Obama cent Medicare contribution tax on the un-amount for Coverdell education savings ac- campaigned on a promise earned income of higher-income individuals,counts (Coverdell ESAs) is scheduled to revert to estates and trusts effective January 1, 2013.$500. At the same time, the expanded definition to extend the Bush- The Medicare contribution tax applies to netof qualified education expenses for elementary era tax cuts for lower investment income (NII), and will gener-and secondary school would also expire. ally apply to passive income. The Medicare and moderate income contribution tax also applies to capital gainsStudent loan interest deduction individuals, but to allow from the disposition of property. For indi- viduals, the Medicare contribution tax willUnder current law, certain enhancements to them to expire for higher- apply to the lesser of the taxpayer’s NII orthe student loan interest deduction are sched- income individuals. The the amount of “modified” adjusted grossuled to expire after 2012. If not extended, income (AGI with foreign income addedthe incentive would only be available for the President is not expected back) above a specified threshold.first 60 months after repayment begins and to change his positionwould phase-out for taxpayers with adjusted IMPACT. The modified AGI thresholdsgross income between $40,000 and $55,000 after the election, but for individuals are $250,000 for mar-($60,000 and $75,000 for married couples fil- there could be some ried taxpayers filing jointly and surviv-ing joint returns). ing spouses; $125,000 for married tax- compromises on the payers filing separately; and $200,000 income thresholds that for single taxpayers and heads of house-HEALTH CARE trigger the higher rates.” hold. These threshold amounts are not indexed for inflation.President Obama’s second term is expected tosee the continuing implementation of the Pa- IMPACT. The Medicare contribution taxtient Protection and Affordable Care Act (Af- COMMENT. In 2012, the GOP-con- is not applicable to income derived from afordable Care Act). Many tax-related provi- trolled House attempted to repeal all trade or business, or from the sale of prop-sions in the Affordable Care Act are scheduled or parts of the Affordable Care Act, erty used in a trade or take effect in 2013 and beyond, including: but the bills died in the Democratic- controlled Senate. It is unclear if this NII for purposes of the Medicare contribu- 3.8 percent Medicare contribution tax pattern will be repeated in 2013. The tion tax includes gross income from inter- (2013) House GOP has strongly signaled its est, dividends, annuities, royalties, and rents, 0.9 percent additional Medicare tax opposition to the IRS’s proposed regula- provided this income is not derived in the (2013) tions on the Code Sec. 36B premium ordinary course of an active trade or busi- $2,500 contribution limit on health assistance tax credit and is likely to ness; gross income from a trade or business flexible spending accounts (2013) continue to oppose them. The GOP- that is a passive activity (within the mean- Increased threshold for itemized medi- controlled House may also try to reduce ing of Code Sec. 469); gross income from cal expenses (2013) funding to the IRS and other federal a trade or business of trading in financial CCH Tax Briefing
  8. 8. 2012 Post-Election Tax Policy8 instruments or commodities; and net gain COMMENT. For AMT purposes the commitment to help establish a legacy for (taken into account in computing taxable itemized deduction threshold for med- his second term. income) from the disposition of property ical expenses remains unchanged at that is not held in an active trade or business. 10 percent. A tax reform movement has been growing on Capitol Hill for several years as well and COMMENT. The IRS is expected to issue may provide a bipartisan opportunity on guidance about the 3.8 percent Medicare Health Flexible Spending which to act. The House Ways & Means contribution tax before year-end. Arrangements Committee held over a dozen hearings on tax reform in 2011 alone. In 2012, tax re- IMPACT. Higher-income taxpayers also are After 2012, the Affordable Care Act caps the form hearings before Ways & Means fo- faced with a top rate on ordinary income of maximum salary reduction contribution to a cused, among other issues, on closely-held 39.6 percent and a 20 percent capital gains health flexible spending arrangement (health businesses (March 7), retirement security rate if the President follows through on his FSA) at $2,500. Salary reductions in excess (April 17), and capital gains (September campaign promise to allow the Bush-era of $2,500 will subject the employee to tax 20). The Senate Finance Committee also tax cuts to expire for these higher-income on distributions from the health FSA. The held hearings in 2012 that included the taxpayers. That creates an effective top rate $2,500 limit will be indexed for inflation for examination of tax reform in connection of 43.4 percent on all NII-taxed income, tax years beginning after December 31, 2013. with extenders (January 31), the state and except capital gains, which will be taxed at local tax system (April 26), and education a 23.8 percent effective top rate. COMMENT. Effective January 1, 2011, tax benefits (July 25). A March 1, 2012 let- the Affordable Care Act prohibited health ter from Ways & Means Chair Dave Camp, FSA dollars from being used to reimburse R-Mich, sums up the increasing resolve of Additional Medicare Tax the cost of over-the-counter medicines (ex- those on Capitol Hill to follow through on The Affordable Care Act also imposes an ad- cept insulin). tax reform: ditional 0.9 percent Medicare tax on high- er-income individuals, effective January 1, “The Committee recognizes that a 2013. The additional Medicare tax applies Medical Devices complex, burdensome, anti-growth tax to total wages, other compensation, and The Affordable Care Act imposes a 2.3 per- code remains a significant obstacle to self-employment income that exceeds the cent excise tax on the sale of qualified medi- economic recovery and job creation. applicable threshold amount for the indi- cal devices by manufacturers, producers and Accordingly, the Committee antici- vidual’s filing status. importers after December 31, 2012. pates continuing its extensive efforts to simplify and reform the tax code for in- IMPACT. The threshold amounts are (not IMPACT. The excise tax does not apply to dividuals, families, and employers …” adjusted for inflation): $200,000 for in- many medical devices that are commonly dividuals; $250,000 for married couples purchased by consumers such as eyeglasses, In the weeks leading up to the Novem- filing a joint return; and $125,000 for contact lenses, hearing aids and other de- ber elections, a number of lawmakers married couples filing separate returns. vices generally sold to the public at retail from both parties said that the Simpson- for individual use. Bowles Plan (named for the co-chairs of the 2010 Presidential Commission on Itemized Deduction for Fiscal Responsibility and Reform, Alan Medical Expenses POSSIBLE BLUEPRINTS Simpson and Erskine Bowles) could FOR TAX REFORM serve as a framework for a tax and defi- For tax years beginning after December 31, cit reduction package in the lame-duck 2012, the Affordable Care Act increases the For true tax reform to move forward, Congress and then for a more compre- 7.5 percent threshold for itemizing medical ex- Washington observers maintain that the hensive overhaul of the Tax Code in the penses to 10 percent. However, the Affordable full weight of the White House must be 113th Congress. President Obama ap- Care Act temporarily exempts individuals age behind it. They point to former President pointed the 18-member commission of 65 and older from the 10 percent threshold. Ronald Reagan’s leadership that was neces- 10 Democrats and eight Republicans in sary in 1986 to combine the force of the early 2010. The commission, which met COMMENT. Taxpayers (or their spouses) White House, Treasury Department and throughout 2010, issued its final report in who are age 65 or older before the close the IRS in accomplishing the last major December 2010. While the commission of the tax year may continue to apply the overhaul of the Tax Code. Based upon failed to reach a super-majority (14 of 18 7.5 percent threshold for tax years ending President Obama’s campaign statements, members), members of Congress and the before 2017. the President may be ready to make such a Obama Administration are now suggest- CCH Tax Briefing ©2012 CCH. All Rights Reserved.
  9. 9. November 8, 2012 9ing that the Simpson-Bowles plan be giv- IMPACT. Some tax expenditures, such as Businesses. Many business tax expendi-en a second look, to serve as a base from the child tax credit, the earned income tures would also be eliminated under thewhich both Democrats and Republicans tax credit (EIC), the deduction for chari- Simpson-Bowles plan and similar planscan find common ground. table contributions, and the deduction that aim to reduce the corporate tax rate. for home mortgage interest, would likely The Simpson-Bowles plan projects a topSix goals. The Simpson-Bowles plan has six survive tax reform, many observers ad- corporate tax rate of between 26 percentgoals: mit. However, retaining these incentives, and 29 percent, contingent upon elimina- or any others, would need to be offset by tion of business tax expenditures. Achieve nearly $4 trillion in deficit re- higher individual income tax rates. duction through 2020; COMMENT. The Simpson-Bowles plan Reduce the federal deficit to 2.3 percent IMPACT. Flow-through of business income specifies only a handful of business tax ex- of gross domestic product (GDP) by to the individual tax returns of sole own- penditures for elimination. These include 2015 (2.4 percent excluding the plan’s ers, individual partners and S corporation the Code Sec. 199 domestic production Social Security reform); shareholders creates a coordination problem activities deduction, and the Last In/ First Reduce income tax rates, abolish the al- in trying to align individual tax rates with Out (LIFO) method of accounting. The ternative minimum tax (AMT), and cut proposed changes under corporate tax re- Obama Administration, in contrast, has “backdoor spending” in the Tax Code; form. Tackling both individual and corpo- made Code Sec 199 a centerpiece in pro- Cap federal revenue at 21 percent of rate tax reform at the same time, however, viding a 25 percent effective tax rate for GDP and get federal spending below 22 may prove to be too large an undertaking. manufacturers under its corporate reform percent, and eventually to 21 percent; Treasury officials in the Obama Adminis- proposal issued in February 2012. The Ensure lasting Social Security solvency; tration have appeared to favor concentrat- Administration’s FY 2012 Revenue Propos- Stabilize the national debt by 2014, and ing on corporate tax reform first. als (the “Green Book”), on the other hand, reduce it to 60 percent of GDP by 2023 recommends repealing the LIFO method of and 40 percent of GDP by 2035. Capital gains/dividends. Under the Simp- accounting for inventories, a proposal that son-Bowles plan, all capital gains and divi- has been opposed by certain industry groups.Individuals. Various proposed tax reform dends would be taxed at ordinary incomeplans would eliminate many income tax rates (which will have been lowered by the Territorial system. The Simpson-Bowlesexpenditures, simplify others and use the elimination of tax expenditures). The plan plan would gradually move the U.S from arevenue to lower the individual income tax notes that the effective tax rate on invest- worldwide system of taxation to a territo-rates. The Simpson-Bowles plan projected ment income could be reduced by excluding rial system of taxation. Under a territorialthat elimination of all deductions and cred- a portion of capital gains and dividends (for system, income earned by foreign subsidiar-its would achieve a bottom individual tax example, 20 percent) from income. Howev- ies and branch operations would be exemptrate of eight percent, a middle individual er, to offset this exclusion while maintaining from U.S. taxation. The taxation of passivetax rate of 14 percent and a top individual progressivity, the top tax rate on ordinary foreign-source income, however, would re-tax rate of 26 percent. income would have to be increased. main unchanged. CCH Tax Briefing