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ОглавлениеThe final tax acts of 2012
– tax changes we need to know in 2013…..On January 1, 2012, A Democrat was President, the Democrats controlled the Senate and Republicans controlled the House. At the close of voting on November 6th, a Democrat will still be President, the Democrats still control the Senate and the Republicans still control the House…..all this, no change but for the billions and billions of dollars spent on what appeared to be a never-ending political campaign. Will there be a ‘fiscal cliff’ to fall from or is it really a steep, downhill walk into new tax laws? Your guess, like mine in mid-November, when I started writing, was really subject to speculation. We now know that a 2012 tax bill was passed on 1 January 2013 and that taxes were addressed but budget reduction was postponed until later, with a new tax phrase, ‘sequester’ , now being mentioned…..
I beg your indulgence, readers out there: prior to letting you know exactly what the tax act does, I’ve got to do some introductory ‘narrative’…..
Do you happen to know anyone who uses a nicotine patch? At best, it’s a temporary fix, getting the substance you crave via an alternative delivery route. A temporary fix.
On the 1st of January, at approximately 2am, when the US Senate voted 89-8 in favor of a 150 page document known as ‘The American Taxpayer Relief Act’ and later, at approximately 11pm on New Year’s night, the US House of Representatives also voted in favor of this act by a vote of 257 – 167. Of those voting against this act in the House, 154 of them were Republican. This act, my friends, is wrongly named – it should more appropriately be called ‘The Great American Nicotine-like Tax Patch (with theatrical flurry) of 2012/2013, vol.1.”
At breakfast in Hong Kong on the morning of the 31st of December, the last day of the year, at my Hong Kong hangout, the Foreign Correspondents’ Club, the media VIP that I was sipping coffee with wanted to know how, a couple of months before, over a bottle of wine, I predicted exactly how this thing, this political melodrama, would play out. Truth be told, I simply took a rather cynical stab in the dark based upon the gut feeling that these financial/theatrical showdowns have always ended like this – especially with a piece of legislation that was not, no matter what anyone believes, a last minute thing – Oh come on, now: this is a 150 page document. Legislation of that size is not a last minute thing. The only last minute about it was delivering the document to the 535 elected legislators (not all of them there to vote). The only thing unanimous amongst these 535 is that absolutely none of them read it before they voted – and I sincerely doubt that anyone these office holders rely upon read this ‘tax patch’, either. If they had, perhaps they’d discover that this act actually increases the deficit, instead of reducing it, which I thought was everyone’s goal.
Both houses of Congress voted to delay until 1 March 2013 taking any action upon spending cuts. If no action is taken by that day, $US110 billion in spending cuts will automatically begin. Across the board cuts of this magnitude are a fiscal cliff. Thus, vol. 2 of the great acts of 2012/2013 (a continuing work in process?) will emerge.
Around the same time as that, the U.S. will reach its statutory debt ceiling and legislation will be needed to prevent the U.S. from defaulting. Hence, the potential, for vol.3 of the Great American Nicotine-like Tax Patch of 2012/2013.
Now a word about the ‘political demographics’ of the new House of Representatives: Of the 234 Republicans elected to the House of Representatives on 6 November, only 15 of these come from districts which voted for Obama for President. Thus, you are going to have this next House with a majority of 219 members coming from ‘pure’ Republican districts, with little inclination towards compromise. I think that they are going to ‘dig in’ and hold firm with regard to Medicare cutbacks. I also think that President Obama will argue that the tax base must still be extended to include more than .7 percent of U.S. tax filers in the new, higher tax bracket. In other words, ‘It ain’t over, yet, folks!!’ The more things change, alas, the more they really do seem to stay the same.
So who are the biggest ‘winners’ as a result of the New Year vote? That’s an easy answer: those households with income between $US200,000 - $US400,000. Don’t gloat, you winners: you are still going to be ‘tax prey’ unless the US economy improves.
And who are the other winners? Well, between now (3 January) and the day I submit the complete book to the publishers, I expect to come across several winners, those whose lobbyists got exactly what they wanted written within this 150 page document that will only now be read (but not by any member of Congress – I’d bet on that one).
And the biggest losers? W-2 Wage earners who no longer will have that 2 percent holiday on payroll taxes. The average earner in this category will have $US1,000 take home pay during 2013.
O.K. Here’s my summary of that which I think you need to know about the new law…..My ‘top five’:
1)All individual income tax rates that you’ve grown accustomed to remain in effect unless you are within the top .7% of individual income tax filers. A new, ‘old’ tax rate of 39.6 percent is imposed for these filers for all taxable income to be reported on their 2013 tax return – next year in 2014. If you are single and have taxable income of $US400,000 or over, then that amount ‘over’ is subject to the 39.6 percent tax rate. Head of Household (HOH) filers get a $US425,000 threshold while Married Filing Jointly families get the $US450,000 threshold.
2)You will start losing your personal exemptions and itemized deductions if you are in the elite two percent: if you are an single filer, the threshold above which your exemptions and deductions will start declining kicks in at $US250,000. HOH filers? $US275,000…..& if you file MFJ, declining exemptions and deductions start happening once you have $US300,000 of taxable income.
3)The wealth penalty on capital gains - For all taxpayers subject to the 39.6 percent tax rate, there’s a third ‘wealth surcharge’ that you’re going to be responsible for: you’ve now got a 20 percent long term capital gains (LTCG) and qualified dividend tax. For everyone else, nothing changes: the 15 percent LTCG tax rate stays right there for the middle tax bracket tax filers while the zero rate remains unchanged for taxpayers in either the 10 percent or 15 percent tax rate brackets.
4)The payroll tax stimulus has expired – yesiree, folks, for those of you of more modest means than those who are going to be hit up for more taxes as described above, you too will be asked to contribute if you are a salaried employee subject to US Social Security and Medicare withholding. The W-2 employee has had a 2 percent stimulus tax reduction since 2010. It’s gone, now, and there’ll be a lower paycheck for the W-2 employee from the first check issued in 2013. The government estimates that this will cost an average of $US1,000 per family in reduced in-pocket, expendable income. This will hurt a lot of people.
5)Surprise, surprise (to me, at least, I never thought this would happen)! The gift tax and estate tax exclusions will remain the same: $US 5 million (indexed for inflation, though – for 2012 that amount came to $US5,120,000). The gift tax rate, though, goes up from 35 percent to 40 percent. Also, the surviving spouse’s exemption amount will now be permanently increased by the unused portion of the deceased spouse’s exemption. Now don’t say that estate taxation is something that only impacts ‘the wealthy’ because I know of many who are cash poor and very land rich, even after many of the world’s real estate bubbles burst with the start of the current depression (hell yes, it is a depression, don’t deceive yourself!) and whose heirs are not going to get everything that their predecessors had planned for. US estate and gift taxes are something that more people will have to plan for in the future, simply as a matter of wealth preservation.
The other things I feel you should be aware of…..
a)I have had American investors in China and India who have brought friends and family into U.S. real property partnerships. I have a British client whose deceased father owned U.S. real property that is now part of a trust. The IRS’s right to withhold tax on gains from the sale of a U.S. real estate interest has been made ‘permanent’ under this new law and the withholding amount has been increased to 20 percent. But it is not just those potential penalties as much as the current ones for which you are potentially liable for because of not reporting things the IRS has never previously enforced. Obviously my client is concerned. For those of you to whom this applies or to someone you know it will apply to – warn that person in advance…..the penalties (see the section I wrote about penalties in this book) are ‘draconian’!
b)Most of you, filing as overseas U.S. tax filers, use the standard deduction. There are sufficient number of you who itemize, as well, so you should be aware that there is a revised medical care itemized deduction threshold. The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5 percent of Adjusted Gross Income to AGI) 10 percent of Adjusted Gross Income EXCEPT for the years 2013 – 2016 if either the taxpayer or spouse has turned 65 before the end of the year. As an old fart who is still eligible for the lower threshold, trust me when I tell you that I am happy never to come close to ever exceeding the medical threshold – happiness is definitely a low medical cost of life!
c)This is the last item regarding the new law I deem worthy of recognition: Medicare’s tax on investment income.
Think back, those of you out there in tax readership land: new laws reforming health insurance were enacted by both houses of Congress and signed into law by the President, a while back……there’s now an additional tax surcharge because of this. Effective 1 January 2013, a new tax is imposed upon individuals equal to 3.8 percent of the lesser of either that individual’s investment income for the year or the amount that individual’s modified adjusted gross income (i.e. you’ve got to add back the foreign earned income exclusion you took to get modified AGI) exceeds the threshold amount of $US250,000 if you file Married Filing Jointly (MFJ), $US125,000 for Married Filing Separately (MFS) and $US200,000 for everything else. I wonder just how much it is going to cost the IRS to re-tool their computer system to make this one work?
Let me repeat: The New Year theatrics coming out of Washington DC were only partially ‘Shakespearean’ (i.e. ‘Much Ado About Nothing). There really is a fiscal cliff but I don’t think anyone is going to come falling or tumbling down that decline. I do think, though that it will be tougher and tougher to change an economic decline unless some far more serious steps are taken soon. And I do not think that the political grandstanding on either side warrants much respect. Are our legislators at fault or is the system at fault…..and most importantly, what can be done about it?
A last minute deal? Ha! Ever try to write a 150-page piece of legislation, ‘last minute’? It is impossible! And to me, if no one else, it is deplorable that absolutely no Congressperson or Senator publicly complained about not being given adequate time to read what they voted upon before they cast their vote. Sadly, I doubt that given the time, any of them would have read it, anyhow. I defy anyone to tell me that I am wrong about stating this!! (and I ask, once again: are our legislators at fault or is the system at fault?)
Who wrote all that legislation? Who is it written for? What is the true economic impact? How long will it take to figure this one out?????
Have things always been like this? Will it ever change…..?
