The fiscal cliff deal and you

January 2, 2013

Late last night, the U.S. House of Representatives voted 257 to 167 to approve the fiscal cliff legislation drafted and passed in the Senate earlier in the day. Although the agreement doesn’t address all issues, particularly many relating to spending cuts, the key provisions of the “mini” deal include:

  • Permanent extension of Bush-era marginal tax rates up to $400,000 for singles and $450,000 for married couples.
  • Permanent rate of 15% on capital gains and dividends up to $400,000 (singles) and $450,000 (married); 20% rate for both if above threshold.
  • Permanent estate tax policy on portability and unification of a $5 million exemption indexed for inflation and a 40% top rate.
  • Personal exemption and the itemized deduction limits set at $250,000 for singles and $300,000 for joint filers.
  • Permanent indexing of the Alternative Minimum Tax (AMT) for inflation.
  • No cap on itemized deductions, avoiding limits on employee contributions to defined contribution retirement plans and IRAs.
  • An expansion of eligibility for Roth conversions. While current law permits participants in deferral plans (including 403(b) and 457 plans) to have Roth accounts (permitting participants to save on an after-tax basis), conversions from pre-tax retirement accounts to Roth accounts are effectively available only for distributable amounts. Under the compromise, any non-Roth amount could be converted to a Roth account in the same plan, regardless of whether the amount is distributable.
  • A retroactive two-year extension, through 2013, for most tax extenders. This includes the IRA charitable rollover provision, which enables individuals age 70½ and older to make tax-free distributions, up to $100,000 per year, directly to qualified public charities. The rollover can also satisfy a required minimum distribution.
  • Expiration of the temporary payroll tax cut.
  • A delay in dealing with the “sequester” or the automatic spending cuts for two months.
  • One-year extension of unemployment insurance.
  • No increase in the debt limit, which remains at $16.394 trillion.

While the debt ceiling was technically reached yesterday, the Treasury Department is taking measures to accommodate federal spending through mid- to late February. Since an increase in the debt ceiling was not included in the “mini” deal passed yesterday, Congress and President Barack Obama will now restart negotiations on a “grand bargain” to address the debt ceiling, and will likely need to include some tax reform, spending cuts and entitlement reform provisions.