There
are barely 10 days left in 2012, and we are still waiting for Congress and the
White House to forge an agreement that would prevent more than $600 billion
dollars in tax increases and spending cuts from going into effect on January 1,
2013.
The
House Republicans were originally scheduled to bring their Plan B legislation
to the floor of the House for a vote. The bill would have raised the marginal
income tax rate on household income in excess of $1 million. The Democrats felt
that the $1 million dollar threshold was too high. The bill was unlikely to
pass in the Senate in its current state.
The
Republican bill (Plan B) would have:
- Allowed the top marginal income tax rate, capital gains rate, and dividend rate to expire after 2012 for taxpayers earning over $1 million per year. The top tax rate on ordinary income would increase to 39.6% for these taxpayers, and the top rate on capital gains and qualified dividends would increase to twenty percent (20%).
- Permanently extended the Bush-era tax cuts for taxpayers with income below the $1 million threshold
- Kept the estate tax at its current level. The current estate tax structure has a 35% top rate and a $5 million exemption. The exemption is indexed for inflation.
- Permanently increased the exemption for the individual alternative minimum tax (AMT) and indexed the exemption for inflation. (It is about time that Congress ended the charade of patching the AMT exemption amounts every year or two.) This provision would have been effective for tax years after December 31, 2011; i.e., it would have been retroactive to the beginning of this year.
- Permanently increased the Section 179 expensing limitation to $250,000 and indexed the limitation for inflation after 2013. The limitation would, however, be reduced if the cost of Section 179 property placed into service during the year exceeded $800,000.
Plan
B did not include the spending cuts that House Speaker Boehner had offered in
his previous negotiations with the White House. In addition, the plan did not reinstate
the personal exemption phase-out limitations or the limitations on itemized
deductions.
The Republican plan was announced when House Speaker Boehner rejected an offer from the President that called for $1.2 trillion in new tax revenue. President Obama's offer included provisions that would have allowed most of the Bush-era tax cuts to expire for taxpayers who earned over $400,000. The President’s offer included about $1.2 trillion in spending cuts.
The White House's plan to avoid the fiscal cliff reportedly includes the following:
- Permanently extends the Bush-era tax rates for those taxpayers earning below $400,000
- Returns the estate tax to its 2009 structure when the top tax rate was 45% and there was a $3.5 million exemption per spouse.
- Raises the top capital gains rate and dividend rate to 20%
- Reinstates the personal exemption phase-out limitations and the limitations on itemized deductions for married taxpayers earning over $250,000 and single filers earning over $200,000.
- Permanently patches the individual AMT exemption amounts
- Imposes caps on itemized deductions and major exclusions for upper-income taxpayers effective in 2014.
Although Plan B probably would not have passed in the Senate, it did provide a possible starting point for negotiations between the House and Senate that might have resulted in a compromise that would be acceptable to both chambers.
President
Obama pointed out this week that he has offered a balanced deficit-reduction
plan with more than $1 trillion in spending cuts. He feels that the White House’s offer is
close enough to the Republican plan that it should be possible for both sides to
approve his plan by Christmas.
On Thursday, December 20, the Republicans cancelled the vote on their “Plan B” tax plan. The House Speaker indicated that there were not enough votes to pass the Republican bill. Apparently the bill narrowly cleared a procedural hurdle this afternoon and that made passage of the bill look unlikely. The House also recessed abruptly.
Based
upon reports earlier today, it seems unlikely that a deal will be reached
before December 25. Even if an acceptable
compromise is reached, any final vote would probably occur after Christmas.
While most of the attention regarding the fiscal cliff has focused on the negotiations between Congress and the White House, the IRS is strongly urging Congress to pass the alternative minimum tax patch quickly. The IRS Commissioner said that nearly 100 million taxpayers out of the 150 million taxpayers who are expected to file could be prevented from filing their taxes until March 2013 or thereafter. This number is an increase from the 60 million affected taxpayers that the Commissioner estimated in November.
Absent
swift congressional action, the Commissioner said that nearly 30 million
taxpayers will become subject to the AMT unless the AMT patch issue is resolved
soon. The resulting situation could cause lengthy delays in tax refunds and
unexpectedly higher tax liabilities for taxpayers who were previously unaware that
they would be subject to the AMT. Congress probably does not need to be reminded that there is a large block of
registered voters among those 30 million taxpayers.
While
Congress and the White House search for the sanity clause, we can at least thank
Santa for our presents next week. Perhaps some of our elected officials in Washington need to have some spectral
visitors stop by during the holiday season, not unlike Ebenezer Scrooge.
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