Daily Tax Update - January 2, 2013: House Passes Fiscal Cliff Bill - President Obama Will Sign Into Law

HOUSE PASSES FISCAL CLIFF BILL – PRESIDENT OBAMA WILL SIGN INTO LAW:  The House voted late last night to pass the Senate-passed fiscal cliff bill (H.R. 8, the American Taxpayer Relief Act of 2012) by a vote of 257-167.  In the vote, 172 Democrats and 85 Republicans supported the bill, while 16 Democrats and 151 Republicans opposed it.  There is no indication when President Obama will sign the bill into law.  After the bill’s passage, President Obama said that it's "just one step" in the effort to strengthen the American economy.  While the President said that he was "very open to compromise" in future talks, he emphasized he would not negotiate with Congress over the debt limit.  He said, “I will not have another debate with this Congress over the debt ceiling.”  The President added, “And I believe that there’s further unnecessary spending in government that we can eliminate.  But we can’t simply cut our way to prosperity.  Cutting spending has to go hand-in-hand with further reforms to our tax code so that the wealthiest corporations and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans.  And we can’t keep cutting things like basic research and new technology and still expect to succeed in a 21st century economy.  So we’re going to have to continue to move forward in deficit reduction, but we have to do it in a balanced way, making sure that we are growing even as we get a handle on our spending.”  The bill does not deal with the debt limit, and Congress will have to deal with further spending cuts in February and the debt limit increase in March.

  • House Ways and Means Committee Chairman Dave Camp issued a statement in reaction to the passage of the bill.  Camp said, “As big as that is, it is only the first step when it comes to taxes.  This legislation settles the level of revenue Washington should bring in.  Next, we need to make the tax code simpler and fairer for families and small businesses.  And, we need to pursue comprehensive and fundamental tax reform to make American businesses and workers more competitive in the global marketplace.  Simply put, the tax code is a nightmare.  It is too complex, too time-consuming and too costly.  About 60 percent of individual taxpayers have to hire others to do their tax returns because the code is too complicated.  As a result, if tax compliance were an industry, it would be one of the largest in the United States and would consume 6.1 billion hours - the equivalent of more than three million full-time workers.”  Camp added, “Add to that the fact that the U.S. has the highest corporate tax rate in the OECD and an outdated worldwide system of taxation and it is not too difficult to imagine why many do not view America as an attractive place to invest and hire.  Nothing about the bill we are considering tonight changes any of those realities.  That is why the Ways and Means Committee will pursue comprehensive tax reform in the new Congress.  So, by making Republican tax cuts permanent, we are one-step closer to comprehensive tax reform that will help strengthen our economy and create more and higher paychecks for American workers.  I urge my colleagues to support this bill and get us one-step closer to tax reform.”
  • The tax provisions in the bill include:
    • “Income Tax Rates:  Maintains current rates on income below $400,000 for singles and $450,000 for couples. Would permanently increase tax rates on income above that to 39.6 percent from 35 percent.
    • Dividends and Capital Gains Rates:  Permanently increases tax rates to 20 percent from 15 percent for single people with income over $400,000 and couples over $450,000.
    • Exemptions and Deductions:  Reinstates provisions that phase out personal exemptions and deductions for incomes over $250,000 for singles and $300,000 for couples.
    • Alternative Minimum Tax:  Permanently indexes the alternative minimum tax for inflation, preventing millions of taxpayers from being affected.
    • Estate Tax:  Permanently increases tax rates to 40 percent from 35 percent on the value of estates over $5 million.
    • Tax Credits:  Extends tax cuts in the 2009 stimulus law for five years, including a child tax credit, an expanded earned income credit and a refundable credit for college tuition. Extends some business tax credits for one year.
    • Payroll Tax Increase:  Allows payroll taxes to rise on Tuesday to 6.2 percent from 4.2 percent on workers’ first $113,700 of income.
    • Unemployment Insurance:  Extends expansion of unemployment insurance for a year.
    • A nine-month extension of the farm bill.
    • Across-the-board cuts: Delays for two months $109 billion worth of across-the-board spending cuts set to start striking the Pentagon and domestic agencies this week.
  • A summary of the bill can be accessed here.
  • The legislative text of the bill can be accessed here.

TAX LEGISLATION INCLUDES ROTH CONVERSION OPPORTUNITY FOR RETIREMENT PLAN PARTICIPANTS: Section 1002 of the American Taxpayer Relief Act of 2012 (the “Act”) revises section 402A of the Internal Revenue Code (the “Code”) to permit a special opportunity to convert certain pre-tax deferrals previously made to a retirement plan to Roth deferrals under the same plan.  Section 402A of the Code is the provision that already permits a 401(k) plan, 403(b) plan, or 457 plan to accept Roth contributions, if a number of requirements are met.  The conversion provision applies only to 401(k), 403(b), and 457 plans that accept Roth deferrals, and the transfer of pre-tax deferrals not previously treated as Roth contributions must be made to a “designated Roth account” within the same plan.  Presumably, a plan amendment designed to accommodate the conversions will have to be adopted by plan sponsors that desire to allow such in-plan transfers, although no Internal Revenue Service guidance is available on section 1002 of the Act at this time.

  • In contrast to in-plan Roth rollovers that were previously permitted under the Small Business Jobs Act of 2010, section 1002 of the Act does not require a plan participant to have experienced a distributable event (such as a severance from employment or reaching age 59&1/2) in order to make an in-plan Roth transfer.  Rather, the new provision specifically provides that a permitted transfer will not be treated as violating the early distribution rules that ordinarily apply to 401(k), 403(b), and 457 plans.  When the transfer occurs, the “converted” amount will be treated as a qualified rollover contribution to the in-plan Roth account and become subject to income tax in the year in which the transfer occurs.  The new Roth transfer provisions apply to transfers made after December 31, 2012, with respect to a plan participant’s taxable year ending after that date (i.e., transfers made on or after January 1, 2013, for most individual taxpayers).  Section 1002 was included in the Act as a revenue generating measure, and is estimated to raise $12.186 billion over a ten year period.  

SENATE CONFIRMS NOMINATIONS OF LAUBER AND BUCH TO TAX COURT:  On January 1, the Senate confirmed the nominations of Albert Lauber and Ronald L. Buch Jr. to serve as Tax Court judges.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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