On Jan. 2, President Barack Obama signed the American Tax Relief Act, an eleventh-hour bill designed to resolve the year-long fiscal cliff debate over expiring tax breaks and automatic spending cuts set to take effect in 2013. The legislation staves off massive job losses and a potential economic recession, but it raises more questions about government-spending policies, entitlement programs and the need for a viable debt-reduction plan.
Here’s a rundown of the law’s key components:
Marginal Tax Rates: Permanent extension of current policy up to $400,000 for singles, $450,000 for married couples. For taxpayers with more than $400,000 in taxable income or couples with $450,000, the top tax rate would rise to 39.6% in 2013 from 35% in 2012.
Capital Gains and Dividends: Permanent 15% top capital gains and dividends rate up to $400,000 for singles, $450,000 for married couples; 20% tax rate for both cohorts above those thresholds.
Estate Tax: Permanent extension of current policy on portability (allowing the spouse to claim the exemption) and unification (gift and tax allowance combined) with a $5 million exemption indexed for inflation and a 40% top rate.
Personal Exemption Phaseout (PEP) and Pease: Permanent relief from PEP and Pease—limits on itemized deductions named after Democratic Congressman Donald Pease—under $250,000 for singles and under $300,000 for married couples.
Alternative Minimum Tax (AMT): Permanently indexed for inflation to mitigate the impact on the middle class.
Tax Extenders: Adopts tax credits related to research and experimentation, local sales taxes, foreign investments and alcohol fuel, with a two-year extension through 2013.
Temporary Payroll Tax Cut: Expiration of a 2% reduction in the amount taken out of employees’ paychecks to cover the cost of Social Security.
Bonus Depreciation: One-year extension of 50% bonus depreciation, which allows small-business owners to depreciate 50% of the cost of qualified property during the first year the property was placed in service.
Stimulus Tax Credits: Five-year extension of the Child Tax Credit, the Earned Income Tax Credit and the American Opportunity Tax Credit. The Child Dependent Care Tax Credit will be permanently extended.
Deduction Cap: No cap on deductions.
Debt Limit: No increase in the debt limit—it remains at $16.39 trillion.
Sequester: Automatic spending cuts are turned off for two months and paid for with a reduction in the discretionary-spending cap for 2013 and 2014, and expanding eligibility for Roth 401(k) conversion.
Community Living Assistance Services and Supports Act: Repeal of CLASS Act, a long-term care insurance provision of 2010 health-care legislation.
Doc Fix: One-year extension of a deferral of cuts to physician reimbursement paid for by reducing Medicare spending.
Unemployment Insurance: One-year extension of current extended benefits program.
Farm Bill: One-year extension of the Food, Conservation and Energy Act of 2008 at no additional cost to the taxpayer.