The fiscal cliff deal that was approved by Congress sent the markets soaring Wednesday, but lawmakers, political pundits and industry officials were quick to weigh in with their opinions—positive and negative—on the deal.
The legislation, H.R. 8—the Taxpayer Relief Act of 2012—was sent to President Barack Obama for his signature and contains approximately $620 billion over 10 years in higher taxes, mostly falling on high-income earners. The bill was approved by the Senate at 2 a.m. on Jan. 1 by a 89-8 vote, with the House passing the measure at 11 p.m. the same day by a vote of 257 to 167.
While a number of GOP lawmakers voted to pass the bill and boost taxes on the wealthy, Sen. Richard Shelby, R-Ala., ranking minority member on the Senate Banking Committee, told Fox Business that passing the legislation was “a mistake.” The lawmakers who voted for the legislation, he said, would “rue the day.”
Noting that he would have preferred a “grand bargain,” Shelby said that Obama rushed a bill through so the country wouldn’t fall into recession. He said the legislation ultimately does little to cut spending. While the nation needs comprehensive tax reform, “We also need to look at entitlement reform and we need to look at the spending ledger; we’re always wanting to spend and promise and spend and borrow, but not cut,” Shelby said. “We’re headed down the road that Europe’s already on.”
Important Advisor-Related Changes
Of particular interest to advisors is that the legislation extends the majority of tax cuts that were scheduled to expire at the end of 2012, as well as retroactively reinstates some rules that had expired in 2011, notes Michael Kitces in his latest Nerd’s Eye View blog. Kitces notes that the bill also introduces a number of new changes: a new top tax bracket increasing to 39.6%, and an increase in the top long-term capital gains and qualified dividend rate to 20%. Some old rules that had lapsed and were scheduled to come back have in fact returned, Kitces points out, such as the Pease limitation (phaseout of itemized deductions) and the Personal Exemption Phaseout (PEP).
In addition, the legislation sets out a new rule allowing 401(k) participants to complete intra-plan Roth conversions if the employer offers designated Roth accounts under the plan, regardless of whether the individual is allowed to take a distribution out of the plan, Kitces says. The transaction, he says, will be taxed in a similar manner to any other Roth conversion.
While those families with incomes above $450,000 and individuals above $400,000 will now face a new top tax bracket of 39.6%, up from 35%, the tax on capital gains and dividends will be permanently set at 20% for those with incomes above the $450,000/$400,000 threshold, while remaining at 15% for those below that level.
Ron Rhoades (left), assistant professor and chairman of the financial planning program at Alfred State College, says in his Jan. 1 blog post that while the 20% rate on long-term capital gains was anticipated, the compromise to permit qualified dividends to be taxed at 20% is the “larger surprise” and a “real benefit to those Americans who own stock (within taxable accounts) in publicly traded corporations, and to those who own stock mutual funds in taxable accounts.”
As to the estate tax, it will be set at 40% up from the current level of 35% for those with estates over $5 million ($10 million for couples), and it will be indexed to inflation. Rhoades says that preserving the current estate tax exemptions is another big “win” for the “asset rich.”