As many of you now know, late last night the House passed the American Tax Relief Act of 2012, sending the Senate-crafted bill to the President which will avert the "Fiscal Cliff". The details of the bill were brokered by Vice President Joe Biden and Senate Minority Leader Mitch McConnell (R-KY), and primarily focus on the taxation side of the fiscal cliff. A summary of the new law provided by Leader McConnell is below and a more detailed  "section-by-section" on the law provided by Senate Democratic Leadership is attached. Of course, the President is expected to sign the bill into law.

 

The Senate passed the law by a vote of 89 - 8 early in the morning on New Year's Day. The House passed the measure by a vote of 257 - 167 late last night. If you are interested in how your Members of Congress voted you can look at the vote total in the Senate here and in the House here.

 

 

SUMMARY OF PROVISIONS IN

 

In addition to the summary above, we wanted to highlight a few key provisions impacting independent insurance agencies: 

• Provides permanent tax relief at current income tax rates for taxpayers earning below $400,000 (single) and $450,000 (joint). For income earned over these thresholds, rates will increase to 39.6 percent. Note this does not include the 0.9 percent Medicare surtax enacted by the Patient Protection and Affordable Care Act (PPACA), so these rates will in reality be 40.5 percent.
• Provides permanent capital gains and dividends tax relief for taxpayers earning below the $400,000/$450,000 income thresholds. For taxpayers earning over these amounts, rates on capital gains and dividends will increase to 20 percent. Note that this does not include the 3.8 percent investment income tax from the PPACA, so these rates are in reality 23.8 percent.
• The estate tax rate will be permanently set at 40 percent (up from the current 35 percent), with a $5 million (single) and $10 million (joint) exemption. Those thresholds will be indexed for inflation.
• The payroll tax holiday will be allowed to expire.
• Permanently reinstates the Personal Exemption Phase-Out (PEP) and Pease limitation, which limits the ability of some taxpayers to utilize personal income exemptions and itemized deductions. The PEP would reduce the personal exemption ($3,800 in 2012) of filers and their dependents by 2% for every $2,500 that their AGI exceeds the applicable threshold-- $300,000 (married filers) and $250,000 (single filers), indexed to inflation. The Pease limitation limits the value of itemized deductions by creating a 3% surcharge of the amount a filer's AGI exceeds the applicable threshold (identical to PEP income thresholds) up to 80% of a filer's itemized deductions.
• Permanently repeals the CLASS Act and creates a Presidentially-appointed commission to study ways to address long-term care needs.
• Cuts new funding for Co-Ops under the PPACA.
• The Farm Bill received a nine-month extension. The extension will allow Congress to complete a new and comprehensive 5 year farm deal, but will still provide another round of direct payments. Both House Agriculture Committee Chairman Frank Lucas (R-OK) and Senate Agriculture Committee Chairwoman Debbie Stabenow (D-MI) have indicated that despite this one year extension, they intend to begin the mark-up process on a 5 year Farm bill in February.

 

Also of importance, the law delays the automatic sequester cuts that were scheduled to take effect January 1, 2013 for two months. According to CBO it also adds $4 trillion dollars to the deficit (over ten years) and does not address the debt ceiling (which must be raised again by March, according to current estimates). These facts mean that another huge fiscal debate will take place in late February/early March.

 

Separately, the House abruptly decided last night to pull consideration of their Hurricane Sandy disaster aid bill, which included a much-needed increase in the National Flood Insurance Program's (NFIP) borrowing authority. The Senate had passed a Hurricane Sandy package containing $60.4 billion in aid (including $9.7 billion for NFIP borrowing authority). As of yesterday afternoon the House strategy had been to split the aid into two pieces and attempt to send either one or both back to the Senate.The House Appropriations Committee had gone so far yesterday as to file a $27 billion bill (containing emergency funding including the NFIP funds) together with an amendment to be offered by Rep. Rodney Frelinghuysen (R-N.J.) seeking an additional $33 billion (for more long-term projects) to match the Senate passed package of last week.    

 

The decision last night to pull consideration means that, barring an unlikely change of course, the Hurricane Sandy disaster aid passed by the Senate will die at noon on Thursday and the package will have to start over again in the 113th Congress. Time is critically low as FEMA has communicated to Congress that it only has enough cash-on-hand to pay NFIP claims through early January (likely the week of January 7th). Estimates are that damage from Sandy will generate as many as 139,000 claims, but without an increase in the borrowing authority only about 12,000 of these can be covered from existing funds. House Republican Leadership has indicated that this will be a top priority when the new Congress convenes tomorrow at noon and we are hopeful that both chambers can act quickly enough to avoid any interruption in the payment of NFIP claims.

 

This Government Affairs Update is being sent in lieu of an IN&V article since there will be no publication this week due to the New Year's holiday.  Please read future IN&Vs for more information. 

 

 

The American Tax Relief Act of 2012

 

Tax Policy

• Marginal Rates:  Permanent extension of current policy up to $400,000 for singles, $450,000 for married couples.

• Capital Gains & Dividends:  Permanent:  15% top capital gains and dividends rate up to $400k (singles), $450k (married); 20% rate for both above threshold. 

• Death Tax:  Permanent extension of current policy on portability and unification with a $5M exemption indexed for inflation and a 40% top rate. 

• PEP & Pease:  Permanent relief from PEP & Pease under $250,000 (single), $300,000 (married). 

• AMT:  Permanently index AMT for inflation. 

• Tax Extenders:  Adopts package reported by Finance Committee in 2012, with a 2 year extension through 2013. 

• Temporary Payroll Tax Cut:  Allowed to expire. 

• Bonus Depreciation:  1 year extension of 50% Bonus Depreciation.

• Stimulus Tax Credits:  5 year extension.

• Deduction Cap:  There is no cap on deductions.

Spending Policy

• Debt Limit:  No increase in the debt limit -- remains at $16.394 trillion.

• Sequester:  sequester is turned off for two months and paid for with a reduction in discretionary spending cap for 2013 and 2014, and expanding eligibility for Roth conversion.

• CLASS Act:  CLASS Act entitlement repealed.

• Doc Fix:  1 year extension paid for by reducing Medicare spending.

• Unemployment Insurance:  1 year extension of current extended weeks of UI. 

• Farm Bill:  Provides for a one year extension of the Food, Conservation and Energy Act of 2008 at no additional cost to the taxpayer.