2013 - The Fiscal Cliff, Obamacare, And Maybe Even US Tax Reform

2013 — The Fiscal Cliff, Obamacare, And Maybe Even US Tax Reform

The fiscal cliff has mostly come and gone. Last minute legislation has prevented the worst-case scenario of sharply higher US taxes on wages, interest, dividends, capital gains, and on estates.

We're gratified that the predictions we made in an August blog post (and hence republished elsewhere) were largely correct. We said that "we are confident that the legislation avoiding the worst case scenario, 'Taxmaggedon,' will be enacted, whether in 2012 or 2013." We called as the most likely scenario that "the lame-duck Congress takes action in November or December, to delay the effect of the new rules for a year or two...or to pass a compromise between the current rules and the ones scheduled to take effect in 2013." Congress actually waited until January 1, 2013 to pass the "American Taxpayer Relief Act of 2012" which did a little of both. Most of the cliff bill is a permanent compromise between 2012 rules and what was to take place in 2013, although there are a number of credits and other items that were merely extended for a year or two.

We also said that there was reason for hope that the estate tax wouldn't kick in at a US $1,000,000, as scheduled for 2013, instead of the 2012 exemption of US $5,120,000. That in fact happened. The new rate is the same as the 2012 rate, but indexed for inflation. The only bad news is that the top tax rate on estates exceeding the exemption amount has been bumped from 35% to 40%.

Here's what the most prominent features of the new landscape look like:

The top tax bracket of 39.6% kicks in at US $450,000 for married US couples, for US $400,000 for single US persons, and at US $225,000 for a married US person filing separately (typically the case when a US person is married to a non-US person (a "mixed" marriage)). These numbers are indexed for inflation. To the extent that a person is in this new highest bracket, capital gains and dividends, to the extent overall income is above the bracket floor, are now taxed at 20%, rather than 15%. An additional 3.8% tax on net investment income is applied under Obamacare. This tax kicks in at much lower thresholds (US $250K for marrieds, US $200K for singles, and US $125K for marrieds filing separately). The threshold is also calculated differently. It is based on adjusted gross income plus the amount of any foreign earned income exclusion. (The "foreign earned income exclusion" allows US persons working...