Daily Tax Update - November 13, 2012: Congress Returns to Face "Fiscal Cliff"

CONGRESS RETURNS TO FACE "FISCAL CLIFF":  Congress returns to work today and faces pressure to work out a compromise to prevent automatic spending cuts and tax hikes at the end of the year.  The term "fiscal cliff" is used to describe the tax increases and spending cuts that are due to take effect at the end of 2012 and early 2013.

  • Democrats seem willing to cut some entitlement spending and Republicans have suggested that they are willing to negotiate on increasing revenues.  Over the weekend, Sen. Lindsey Graham (R-SC) said, "We need more revenue in Washington.  We need more private sector jobs.  We don't need to raise tax rates.  We need to limit loopholes and deductions for the wealthy."
  • Today, Senate Majority Leader Harry Reid called for a "balanced approach" to deal with the fiscal cliff that included tax hikes on wealthy Americans.  Reid said, "It’s within our power now to forge an agreement to get the richest among us to pay a little more to protect our economic future.  We could avoid the fiscal cliff for 98% of Americans today. . . . It’s one vote away."  Reid added, "Solutions are in our grasp, we only have to make the choice to pull together rather than pull apart.  I urge Republicans to join us in the difficult time ahead."
  • Senate Minority Leader Mitch McConnell said today, "Saying we need a balanced approach is not a plan . . . it’s simply a poll-tested talking point.  The time for the president to lead is now and that means offering a concrete plan that can pass when half of Congress disagrees with raising taxes."  McConnell continued, "The amount of revenue [Democrats are] prepared to push us over the cliff over what wouldn’t fund the government for one week, so why would we want to do that?”  McConnell added, “Republicans like me have said we’re open to tax reform if we address entitlements."  McConnell said, "New revenue must be tied to genuine entitlement reform.  Make no mistake, Republicans are offering bipartisan solutions, now it’s the president’s turn to offer a plan."
  • The following set of revenue and spending measures are set to expire or take effect at the end of this year:

Revenue Increases

  • 2001/2003/2010 Tax Cuts & AMT Patch.  This series of legislation, often referred to collectively as the "Bush tax cuts," will expire on December 31, 2012, raising all income tax rates (top will go from 35%), as well as rates on estate and capital gains taxes.  The alternative minimum tax (AMT) will also automatically apply to millions more citizens.
  • Payroll Tax Cut.  The Social Security payroll tax holiday will expire December 31, raising the rate from 4.2 to 6.2%.
  • Other Provisions.  Several other policies such as the Research and Experimentation tax credit, many of which are typically enacted retroactively, are due to sunset at the end of the year.
  • Affordable Care Act Taxes.  Some provisions in the Obama health care legislation, including increased tax rates on high-income earners, are set to take effect in January 2013.

Spending Cuts

  • Budget Control Act.  The automatic spending cuts or sequester legislated by the Budget Control Act of 2011 will hit January 2.  Half of the scheduled annual cuts ($109 billion/year from 2013-2021) will come directly from the national defense budget, half from non-defense.  However, some 70% of mandatory spending will be exempt.
  • Extended Unemployment Benefits.  The eligibility to begin receiving federal unemployment benefits, last extended in February, will expire at the end of the year.
  • Medicare "Doc Fix."  The rates at which Medicare pays physicians will decrease nearly 30% on December 31.


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