1/ What is the ‘Fiscal Cliff’?
The ‘Fiscal Cliff’ is a package of expenditures sequestration (which are yet to be resolved) but also the American Taxpayer Relief Act of 2012 which was signed into law by President Barack Obama on January 2, 2013. It averts many of the tax hikes that were scheduled to go into effect in 2013 and preserves many favorable tax breaks that were programmed to expire. On the other hand, it also boosts income taxes for some high-income individuals and somewhat increases transfer tax rates.
My goal in posting this blog is to present the consequences of the American Taxpayer Relief Act of 2012 on the US international tax issues. To attain this objective, I will describe the highlights of the Act along with the US international tax bottom line.
2/ The highlights if the 2012 Taxpayer Relief Act and the US international tax bottom line.
What are the tax rate increases for higher income taxpayers?
Subsequent to 2012 year end, the income tax rates for the largest part of individuals will stay at a range of 10% to 35% (instead of moving to 15% to 39.8% as it would have cropped up to would the Act would have not being signed). However, a 39.6% rate applies for income above a certain threshold (specifically, income in excess of the current highest bracket of 35%). These amounts range from $225,000 to $425,000.
International US Tax bottom line: Tax rates will rise for taxpayers making $225,000 to $425,000 depending on their tax status.
What are the capital gain and dividend rate increases for higher-income taxpayers?
Subsequent to 2012 year end, the top rate for capital gains and dividends is increased to 20% (up from 15%) for taxpayers with income exceeding $400,000 (or $450,000 for married taxpayers). Furthermore, there’s 3.8% surtax on investment type income and gains, the overall rate will be 23.8%.
For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will be permanently be subject to a 0% rate.
International US Tax bottom line: Capital gains received by non-US individual taxpayers will generally be foreign sourced (except if from disposition of real estate property) and therefore won’t be affected by these changes in rates. Additionally, investment type income is generally subject to a 30% withholding before considering Tax Treaty benefits.
What is the reinstatement of personal exemption phaseouts for high income taxpayer?
Subsequent to 2012 year end, the Personal Exemption Phase (PEP), which had until that time been suspended, is restored for taxpayers with income ranging between $150,000 to $300,000.
International US Tax bottom line: Taxpayers having income over a certain threshold will have their personal exemption decrease.
What is the reinstatement of limitations for high income taxpayer?
For the tax years beginning after 2012, the limitation on itemized deductions, which had previously been suspended, is reinstated with ranging threshold of $150,000 to $300,000
International US Tax bottom line: Taxpayers with income over a certain threshold will have their itemized deduction decrease.
What is the establishment of permanent Alternative Minimum Tax relief?
AMT is the excess, if any, of the tentative minimum tax for the year over the regular tax for one year over the regular tax for the year. The individual AMT exemption amounts have been retroactively effectively and permanently increased for tax years beginning after 2011.
International US Tax bottom line: Taxpayers will have a retroactive increase of Alternative Minimum Tax Exemption.
What is the retention of the transfer tax exemption amounts and increase in tax rate?
The 2012 Taxpayer Relief Act thwarts sharp increases in estate, gift and generation-skipping (GST) tax that were scheduled to take place for individuals dying and gifts made after 2012 by permanently maintaining the exemption level at $5,000,000. Nevertheless, the 2012 Taxpayer Relief Act also permanently increases the top estate and gift rate from 35% to 40%. The 2012 Taxpayer Relief Act also continues the portability feature that allows the estate of the first spouse to die to transfer the unused exclusion to the surviving spouse.
International US Tax bottom line: The single adjustment from the American Taxpayer Relief Act of 2012 to transfer tax is an increase of the top estate and gift rate to 40% from 35%.
What is the extension and modification of depreciation provisions?
The following among other depreciation provisions are retroactively extended by the 2012 Taxpayer Relief Act through 2014:
- 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant building and improvements, and qualified retail improvements
- Increased expensing limitation and treatment of certain real property as Code Sec. 179 property
- Special expensing rules for certain film and television productions
The 2012 Taxpayer Relief Act also extends and modifies the 50% bonus depreciation provisions for one year so that it applies to qualified property placed in service before 2014.
International US Tax bottom line: Some of the most common depreciation terms remain. Provisions such as limitation and treatment of certain real property expense in-lieu of depreciation, or bonus depreciation are extended. However, be advised that qualified property for Code Section 179 and bonus depreciation do NOT include foreign located property.
Where do we go from here?
The purpose of the American Taxpayer Relief Act of 2012 is to, at least, stabilize the economy or, at most, maintain the economic growth that seems to have been taking place for the last few months with higher tax on the rich, eliminating tax break, and entitlement reform. If America would have gone over the fiscal cliff, businesses would have sharply curtailed investment, returning the country’s economy to recession and, perhaps, deepened recession across the world.
The following articles give a great overview and interesting opinions of the fiscal cliff:
New York Times:
http://www.nytimes.com/2012/11/16/us/politics/the-fiscal-cliff-explained.html?pagewanted=all&_r=0
Guardian:
Wall Street:
http://blogs.wsj.com/washwire/2013/01/03/fiscal-cliff-deal-by-the-numbers/
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