With the passage of the American Taxpayer Relief Act of 2012, or ATRA, we see that we have been fooled again.
In the last campaign season, there was a lot of campaigning on raising taxes in order to reduce the deficit and get our fiscal house in order. The ATRA falls way short of accomplishing the goal of increasing revenues to reduce the deficit and the overall debt.
In scoring the ATRA, the Congressional Budget Office’s March 2012 “baseline scenario,” as revised in August 2012, assumed the total deficits for the 2013-2022 period would be $2.26 trillion. The CBO’s baseline scenario assumed significant deficit reduction due to the expiration of the Bush tax cuts and implementation of substantial spending cuts under the Budget Control Act of 2011. Now, with the passage of the ATRA, the CBO has determined that applying the amounts in the ATRA to the baseline raises the total deficit estimate for the 2013-2022 period by $3.97 trillion, from $2.26 to $6.23 trillion.
With the passage of the ATRA, taxpayers will be looking at the following tax provisions in 2013 and beyond:
• ATRA did not address the expiration of the payroll tax holiday employees have been experiencing. Accordingly, all employees will experience a 2 percent increase in their Social Security taxes back to the rate of 6.2 percent;
• The 0.9 percent increase in Medicare taxes will begin in 2013 for wages in excess of $250,000 for married couples. This means wages in excess of $250,000 will be subject to a Medicare tax of 2.35 percent;
• The 3.8 percent net investment income Medicare tax on passive income will begin in 2013, which will be on the lesser of modified adjusted gross income in excess of $250,000 for married couples or net investment income, including interest, dividends, capital gains, annuities, royalties, and passive rental income;
• The estate and gift tax exemptions will increase to $5.25 million per person and the estate tax exemption continues to be portable;
• Married couples with taxable income in excess of $450,000 will be subject to the highest marginal tax rate of 39.6 percent, not including the additional Medicare taxes they may also be subject to;
• Capital gains and dividends of married couples with taxable income in excess of $450,000 will be taxed at the rate of 20 percent;
• The Alternative Minimum Tax patch has been made permanent and set at $80,750 for married couples in 2013 and will automatically increase in future years based on the rate of inflation;
• The Social Security tax wage ceiling is $113,700 for tax year 2013. There is no ceiling for the Medicare tax;
• The maximum 401(k) contribution for 2013 is $17,500, with an additional $5,500 available to be contributed for those born before 1964;
• Bonus depreciation of 50 percent continues for businesses that place assets in service in tax year 2013 and the section 179 deduction for business assets placed in service in 2013 remains at $500,000 with a dollar-for-dollar reduction for assets in excess of $2 million put into service in 2013; and
• The standard mileage allowance is 56.5 cents per mile for tax year 2013.
In large part, ATRA continued various tax provisions that taxpayers have enjoyed the past few years. Despite complaints about hedge fund managers enjoying capital gain rates on carried interest or investors being able to write off substantial amounts of intangible drilling costs in the first year of an investment or estates being subject to a high exemption from estate or gift taxes, those areas were not addressed by ATRA.
We now turn to the debt ceiling and the spending debate. Was ATRA a glimpse of the future where the debt ceiling is simply raised and spending cuts are put off once again? Are trillion-dollar deficits going to be the norm going forward? When will our leaders lead and put our fiscal house back in order?