Be honest: How many of you worried yourself half to death during the holidays over the fallout that was going to occur as we went over the “fiscal cliff”? You CNBC addicts even got to watch a countdown clock in the lower right-hand corner of your screen the whole month of December.
It turns out your worries were as relevant as the worries that the world would end on December 21, as some Mayans supposedly predicted centuries ago. It all proved to be nothing more than political theater. In the wee hours of January 1, shortly after the ball descended at Times Square, Congress passed major tax legislation hastily drafted behind closed doors. It’s a safe assumption that most congress members had no idea what they were voting for.
Republicans berated Speaker Boehner for caving in, while Democrats lambasted the president for not going far enough on his pledge to raise taxes on the “wealthy.” I personally think Boehner is crazy. Like a fox. He may have even orchestrated the subsequent rumors of a coup that would have removed him as speaker!
What really happened in the waning hours of 2012? First, President Obama campaigned on a pledge to raise taxes for those making more than $250,000 per year, and he won—sort of. During the fiscal cliff “negotiations,” the White House staked out some pretty extreme positions on the spending and debt ceiling issues, even to the point of demanding the right to increase federal borrowing without congressional authority. Congress punted on all of that.
By giving Obama close to what he demanded on the income tax rate for top earners, the Republicans appear to have neutralized the risk of further demands for tax increases. And raising the threshold for the top rates from $250,000 to $450,000 ($400,000 for individual filers) eliminated half the taxpayers who would otherwise have been ensnared in the Obama tax increase.
Now look at the bright side (from the viewpoint of us taxpayers).
• The Bush tax cuts became permanent for all but the top 1 percent of taxpayers.
• The 15 percent capital gains and dividend tax rates became permanent (the rate is 20 percent for the over-$450,000 filers);
• While the estate and gift tax rate went up from 35 percent to 40 percent, the $5 million exclusion ($10 million for married couples) became permanent, and is now indexed for inflation, starting at $5.25 million per person in 2013.
• The gift tax exclusion is now permanently tied to the estate tax exclusion. For many years, the gift exclusion remained at $1 million even as the estate tax exclusion climbed.
• The rule known as “new basis at death,” which wipes out capital gains taxes on a person’s death, has now become permanent. No more threat that we’ll have to deal with the accounting nightmare known as “carryover basis” under which one inheriting an asset would have to prove at what cost the decedent had purchased it.
• The dreaded “Alternative Minimum Tax” threshold has now been permanently indexed for inflation, eliminating the need for annual action by Congress to “patch” the system so millions of middle class taxpayers don’t get clobbered.
And what happened to all the spending and debt ceiling issues? They were kicked down the road to serve as fodder for further political theater in February and March. But this time without tax issues to add fog to the battlefield.
As for me, I think a small increase in tax rates on a tiny segment of the populace is a reasonable price to pay for permanently locking in the 15 percent dividend and capital gains rates for most taxpayers. Taxpayer-favorable resolution of estate and gift taxes and the alternative minimum tax, which have bedeviled financial and estate planners for the past decade, is a decided bonus. Maybe this is what Obama really wanted all along, in which case he is as foxy as Speaker Boehner. But I doubt it.
Tax certainty is a powerful positive for those who look to financial and estate planning “experts” to guide them through our increasingly complex tax laws. If it were up to me, I’d award medals to Speaker Boehner and Mitch McConnell, the Republicans’ lead negotiator in the Senate.
