January 2013 - Are We Over the Fiscal Cliff?
ARE WE OVER THE FISCAL CLIFF?
By Trust, Estate, and Elder Law Attorneys Jennifer & Jeff Hawkins
Did you feel the ‘thud’ when we hit the bottom of the “Fiscal Cliff?” Probably not because the US Senate negotiated a solution while New Year revelers wound down their celebrations and approved a compromise by a vote of 89-8 at about 2:00 a.m. Technically, we hit bottom when simultaneously with the Times Square ball. Almost all of our tax rates leaped up and some critical tax exemptions dropped automatically. However, the House of Representatives picked up the slack in a late-night New Year's Day approval of the Senate compromise by a vote of 257-167 at about 10:45 p.m. The bill became law when President Obama signed it on January 2, 2013.
The compromise, called “American Taxpayer Relief Act of 2012” (referred to hereafter as the "Act"), retains tax rates and brackets for individuals earning less than $400,000 and married couples earning less than $450,000. Individuals and couples earning more than those amounts will increase from 35% to 39.6%. The rate rate on capital gains and dividends will also increase from 15% to 20% for those individuals and couples in the highest income tax bracket. Couples earning more than $300,000 and individuals earning at least $250,000 will also lose personal exemptions in an exemption phaseout.
Many farmers feared huge changes in estate, gift, and generation-skipping transfer taxes. All exemptions under those tax laws fell on New Year’s Day from $5.12 million to $1 million and the maximum tax rate jumped from 35% to 55%. Some southern Indiana farmland prices rose from less than $5,000 per acre 10 years ago to more than $10,000 per acre in 2012. Farmers use their land instead of selling it, so the value spike offers them little benefit, and the Fiscal Cliff’s transfer taxes could have wiped out many farms. Fortunately, if both Congress and President Obama accept the compromise, transfer tax exemptions will return to $5.12 million, while the top transfer tax rates will rise to 40% (technically, the rate fell from the 55% maximum that existed on New Year's Day to the new 40% maximum).
Payroll taxes increased under the Act from 4.2% 6.2%. This tax increase improves Social Security funding, but it will also cut take-home employees' pay.
The Act spares health care providers from deep spending cuts for one more year. The Fiscal Cliff would have cut reimbursements to Medicare physicians by 27%. The one-year reprieve will not affect the Affordable Care Act or reduce benefits for Medicare beneficiaries.
The compromise beefs up important programs for older Americans during 2013. Area Agencies on Aging will receive an additional $7.5 million and Aging and Disability Resource Centers will receive a $5 million boost. The National Center for Benefits and Outreach Enrollment get a raise of $5 million and $7.5 million in additional funding will help Medicare State Health Insurance Programs in 2013.
The Act creates a Commission on Long-Term Care to “develop a plan for the establishment, implementation, and financing of a comprehensive, coordinated, and high-quality system that ensures the availability of long-term services and supports.” The commission is supposed to study all aspects of health care for aged and disabled Americans, such as assisted living facilities, nursing homes, group homes, and home health care. The commission will also study the relationships between Medicare, Medicaid, and private long-term care insurance. The study will consider demographic changes and trends to design a more effective plan to deliver and pay costs of long-term care services. Each of President Barack Obama, Senate Majority Leader Harry Reid, Senate Minority Leader Mitch McConnell, Speaker of the House John Boehner, and House Minority Leader Nancy Pelosi will appoint 3 of the 15 committee members. The committee members are supposed to represent the interests of consumers, older adults, family caregivers, health care workers, private long-term care insurers, state insurance departments, and state Medicaid agencies.
Congress still has much work remaining. The Act delays the dreaded automatic spending cuts until March 1, 2013, but that part of the Fiscal Cliff will still dominate the news until the new Congress decides how to finish the budget plan. Other features such as agricultural programs will end on January 1, 2014, until Congress also intervenes in those matters.
Perhaps we are not entirely over the Fiscal Cliff. Much of our economy still teeters on the edge and only time will tell whether our leaders will pull us back or let us fall.
Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers. Jeff is Vice President of the Indiana State Bar Association (2012-13) and a Fellow of the American College of Trust and Estate Counsel (http://www.actec.org).
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