H.R.8 does not impose new taxes on life insurance, annuities, pensions, retirement savings or employer-provided benefits. But because many Americans now face increased tax liability, these products may hold more appeal for those impacted by the new tax law.
H.R.8 is an expansive bill although much of its scope is focused on tax. Among other things, the bill permanently extends 2012 tax rates on adjusted gross income (AGI) under $400,000/individuals and $450,000/married, permanently raises tax rates on AGI above those levels, delays the across-the-board spending cuts (the sequester) by two months, repeals the shell of the federal government’s long-term care/disability insurance program (the CLASS program) and replaces it with a Commission, extends unemployment benefits for a year, provides a one-year delay in the almost 30 percent cut in Medicare reimbursement rates for doctors, and eliminates the 2013 cost of living adjustment to Congress’ pay.
Many of the tax provisions in H.R.8 are “permanent”—i.e., there is no built-in sunset, or expiration date, connected to them. Of course the 113th (or other future) Congress can change these rules, but they will not automatically change as was the case with 2012 tax rates (and other tax rules).
The new taxes that take effect on January 1, 2013 include:
- A permanent increase in the top two tax rates for adjusted gross income (AGI) that exceeds $400,000 for single taxpayers and $450,000 for married taxpayers filing jointly
- The two new permanent tax rates are 35 percent and 39.6 percent
- A permanent extension of 2012 tax rates for taxpayers with AGI under the $400,000/$450,000 levels
- Dividends will continue to be taxed under capital gains tax rules
- The capital gains tax rate is permanently set at 15 percent for those with AGI under the $400,000/$450,000 level; and at 20 percent for those with AGI above that level (the highest earners will actually see that rate rise to 23.8 percent because of an additional 3.8 percent investment tax included in the 2010 health care overhaul)
- The top estate tax rate is set permanently at 40 percent, but the personal exemption remains $5 million (indexed)
- The PEP (personal exemption phase-out) and Pease (limits on the value of deductions) rules were made permanent and indexed—PEP and Pease now apply to AGI of $250,000 for individuals, $275,000 for heads of household, and $300,000 for joint returns
- There is a permanent “patch” of the alternative minimum tax (AMT)—i.e., the exemption amount for individuals rises from $33,750 to $50,600 and for joint returns from $45,000 to $78,750. The exemption amounts are then indexed (i.e., they will be adjusted for inflation after 2012)
- The bill contains authority to roll over certain retirement plan balances to Roth (taxable contribution/tax-free distribution) accounts within the retirement plan
The bill also repeals the CLASS Act, the moribund new federal program that would have provided long-term care/disability insurance through an employer-based automatic deduction system. It sets up a new federal Commission that would study and then recommend to Congress ways to address Americans’ long-term care needs. The Commission would include representatives from federal and state agencies, providers of long-term care insurance and services, and consumers.
Other elements of the tax package include a decision to let the temporary Social Security payroll tax holiday expire (that means all taxpayers will pay an additional two points in FICA or SECA tax in 2013 and thereafter); a five-year extension of the child tax credit, the opportunity tax credit (education tax incentives), and the earned income tax credit; a one-year extension of the rule that allows small business to expense up to $250,000 in qualified expenditures; and extension/reinstatement through 2013 of the tax-extender package, which includes the rule that allows a direct tax-free gift from an IRA to a charity.
Next Steps: H.R.8 does not contain instructions or an expedited process for tax and/or entitlement reform in 2013. However, in the next two months Congress will again be tackling deficit reduction due to the expiration of the sequester delay, the need to raise the debt ceiling, and the fact that funding for the federal government runs out in March. It is likely there will be a renewed effort to include instructions and an expedited process for tax (and possibly entitlement) reform in this upcoming legislative process.
Further, even without statutory instructions and/or an expedited process, it is widely expected that tax reform will be among the 113th Congress’ top priorities. Work on tax reform is likely to begin early in the new year, probably before spring.