We have jumped off the cliff

The good news is that the Republican and Democratic leadership seems to have come to an agreement about renewing the Bush tax cuts.  The bad news is that it was impossible logistically to pass a bill before midnight on New Year’s Eve when the cuts expire and automatic spending cuts kicked in.  So we have jumped off the fiscal cliff, though there is hope that Congress will clamber back up it with a retroactive action.  From CNBC:

With no vote likely on Monday night, the U.S. will technically be going over the “fiscal cliff” at midnight, sources told CNBC.

The emerging deal with the Senate would raise tax rates on family income over $450,000 a year, increase the estate tax rate and extend unemployment benefits for one year.

The parties were at an impasse over whether to put off the automatic, across-the-board spending cuts set to begin taking effect at midnight, and if so, how to pay for that. One official said talks were focused on a two-month delay in the across-the-board cuts but negotiators had yet to agree on about $24 billion in savings from elsewhere in the budget.

“Today it appears that an agreement to prevent this middle class tax hike is in sight,” Obama said in an early afternoon appearance from the White House, where he stood in front of cheering supporters.

“Over the next 12 hours, let’s see if we can get this done,” Obama said.

Obama expressed regret that the work of the administration and lawmakers won’t produce a “grand bargain” on tax-and-spend issues, but said that “with this Congress, it couldn’t happen at that time.”

Before he spoke, details of the emerging deal emerged. It would raise $600 billion in revenue over the next 10 years by increasing tax rates for individuals making more than $400,000 and households making above $450,000 annually, officials familiar with the talks said.

The deal would also delay a series of spending cuts known as the “sequester,” though a sticking point remains on how long that delay would last. McConnell said action on the sequester could continue in coming months. “Let’s pass the tax relief portion now, let’s take what’s been agreed to and get moving,” McConnell said.

Other details included increasing the estate tax rate, extending unemployment benefits for one year, officials familiar with the negotiations said. The officials, speaking on condition of anonymity, said an agreement would shield Medicare doctors from a 27 percent cut in fees and extend tax credits for research and development, as well as renewable energy.

The deal also would extend for five years a series of tax credits meant to lessen the financial burden on poorer and middle-class families, including one credit that helps people pay for college.

via Going Over the ‘Cliff,’ but Tax Agreement ‘in Sight’.

We are also going off the Dairy Cliff.   The Farm Bill has also expired when the crystal ball touched down in Times Square.  As a result, a price support mechanism devised in 1949 kicked in, whereby the U.S. government has to buy milk for $7-$8 per gallon in today’s money.  This would more than double the price of milk in the supermarket.  Reportedly, an agreement has been struck that would renew the Farm Bill, though, again, it remains for Congress to act.

The wild card in all of this is whether the party leaders can deliver the votes from their members.  Some Congressional Republicans are said to be upset that spending cuts are not being included, with some Congressional Democrats incensed at the cutoff for higher taxes being raised to $450,000 rather than the $250,000 that President Obama campaigned on.

How much the fiscal cliff will cost you

To descend from the theoretical to the tangible, here is how much your taxes will increase once the Bush tax cuts expire on Tuesday, unless Congress cuts a deal to extend them:

Annual income of $20,000 to $30,000: $1,064 average tax increase

Annual income of $40,000 to $50,000: $1,729 average tax increase. . . .

Annual income of $50,000 to $75,000: $2,399 average tax increase

Annual income of $75,000 to $100,000: $3,688 average tax increase

Annual income of $100,000 to $200,000: $6,662 average tax increase. . . .

Annual income of $200,000 to $500,000: $14,643 average tax increase

Annual income of $500,000 to $1 million: $38,969 average tax increase

Annual income of more than $1 million: $254,637 average tax increase

via What falling off the “fiscal cliff” means for you – CBS News.

If these expire, the much-reviled George W. Bush will surge in popularity once people realize how much money he kept in their pockets.  But the popularity of the president and especially Republicans will plummet.

Voting for “plan B” would not violate the pledge

In the fiscal cliff negotiations, President Obama wants to renew the Bush tax cuts for everyone except those who make $250,000.  House Speaker Boehner, in what he is calling his “plan B,” is saying that Republicans would be willing to let taxes go up for people making $1 million and more.  (He may be hoping to split the difference with a proposal once made by former House Speaker Pelosi to put the cut-off at $400,000.)

Interestingly, Grover Norquist at Americans for Tax Reform, which has been collecting pledges from Republican lawmakers that they would never vote for new taxes, is saying that a vote for plan B would not violate the pledge, presumably because the vote would be to renew the tax cuts and that letting some tax cuts expire is not the same as actively voting to raise taxes.  (But wouldn’t that logic apply to the $250,000 level also?)  Here is the ATR statement:

“Republicans supporting this bill are this week affirming to their constituents in writing that this bill — the sole purpose of which is to prevent tax increases — is consistent with the pledge they made to them. In ATR’s analysis, it is extremely difficult — if not impossible — to fault these Republicans’ assertion,” reads the statement posted on ATR’s website Wednesday morning.

“In particular, in this Congress the House has already voted twice to prevent any tax increases on any American,” the statement continues. “When viewed with this in mind, and considering this tax bill contains no tax increases of any kind — in fact, it permanently prevents them — matters become more clear. Having finally seen actual legislation in writing, ATR is now able to make its determination about a legislative proposal related to the fiscal cliff. ATR will not consider a vote for this measure a violation of the Taxpayer Protection Pledge.”

via Conservative groups, but not ATR, line up against ‘Plan B’ | The Daily Caller.

Nevertheless, other conservative groups are rejecting Plan B, and President Obama and congressional Democrats are still holding firm for the $250,000 cut-off.

Would those numbers matter to you in your support for a fiscal cliff bill?  Does the new Norquist logic make sense, or is it mere casuistry to give lawmakers a cover to break their promises?  Is letting some Americans’ taxes go up preferable to making all Americans’ taxes go up, which is what would happen on January 1 if no legislation gets passed?

UPDATE:  Boehner put his plan before Congress, but it was shot down, as even Republicans failed to support it.

 

If you have a big estate, die or give it away by January 1

Income taxes for everyone are not the only taxes that will jump up, should we jump off the fiscal cliff.  The estate and gift taxes will also soar dramatically. George Will is sardonic about it:

If you have worked hard for five decades, made pots of money and now want to squander it all in Las Vegas on wine, women and baccarat, go ahead. If, however, you harbor the antisocial desire — stigmatized as such by America’s judgmental tax code — to bequeath your wealth to your children, this would be an excellent month to die. Absent a congressional fix before Jan. 1, the death tax, which is 35 percent on estates above $5 million, reverts to 55 percent on those above $1 million.

via George F. Will: Fixing the tax code at the cliff’s edge – The Washington Post.

Rather than dying, many wealthy folks are giving their money away to their heirs, something else that will be heavily taxed after January 1.  From CNN Money:

Currently gifts and estates of up to $5.12 million are exempt from taxes, but as part of the fiscal cliff, any portion of a bequest that exceeds $1 million will be taxed next year — and at a 55% rate (currently, the rate is 35%). That will kick in unless Congress and the president agree to extend the current exemption or agree on a new one. Many older Americans are not waiting to see if that happens.

“It’s crazy,” said Richard Behrendt, Director of Estate Planning for Baird’s Private Wealth Management. “I bet more wealth is transferred this year than in the past 10 years combined.”
Jonathan Blattmachr, a principal of Eagle River Advisors in New York who has lectured groups of estate planners about the expiring exemption, said the amount given away in 2012 will be three or four times that of any other year.

The drop to a $1 million exemption means that the tax bill on gifts or estates of $5.12 million will go from zero this year to $2.266 million next year, according to Blattmachr.

What do you think about the estate tax?  One strain of puritanism has always disapproved of the “idle rich,” such as those trust fund kids on Lifestyles of the Rich and Famous jetting to Monaco and other of the world’s playgrounds.  The thought is, people should earn their wealth by hard work, not just live off of the hard work of their forebears.

Then again, inheritance is related to the unity of the family across generations.  Also, those with inherited wealth are not necessarily “idle,” since they usually have to keep the family business in good working order.

The inheritance tax is often devastating to farmers and owners of small businesses.  Farmers are often cash poor, but land rich.  That is, the soaring price of land makes them wealthy on paper, in terms of assets, but they don’t necessarily have much actual money.  Frequently, when the landowner dies, the farm has to be sold to pay the estate taxes.  The heirs don’t have that kind of money even if they want to continue the family farm.  The same can hold true for small businesses, which often have to be dissolved upon the death of the owner when the heirs can’t come up with the cash to pay the inheritance tax.

Surprise in Obamacare

Obamacare was passed so quickly that, admittedly, lawmakers did not have time to so much as read the multi-volume bill.  Hardly anyone, opponent or proponent, knows everything that Affordable Health Care law will do.  So as it is being implemented over the next two years, we will probably keep getting surprises.  Here is the latest, from the Associated Press:

Your medical plan is facing an unexpected expense, so you probably are, too. It’s a new, $63-per-head fee to cushion the cost of covering people with pre-existing conditions under President Barack Obama’s health care overhaul.

The charge, buried in a recent regulation, works out to tens of millions of dollars for the largest companies, employers say. Most of that is likely to be passed on to workers.

Employee benefits lawyer Chantel Sheaks calls it a “sleeper issue” with significant financial consequences, particularly for large employers.

“Especially at a time when we are facing economic uncertainty, [companies will] be hit with a multi-million dollar assessment without getting anything back for it,” said Sheaks, a principal at Buck Consultants, a Xerox subsidiary.

Based on figures provided in the regulation, employer and individual health plans covering an estimated 190 million Americans could owe the per-person fee.

The Obama administration says it is a temporary assessment levied for three years starting in 2014, designed to raise $25 billion. It starts at $63 and then declines.

Most of the money will go into a fund administered by the Health and Human Services Department. It will be used to cushion health insurance companies from the initial hard-to-predict costs of covering uninsured people with medical problems. Under the law, insurers will be forbidden from turning away the sick as of Jan. 1, 2014.

via Surprise: New Insurance Fee in Health Care Reform Law – DailyFinance.

Yes, it’s nice that pre-existing conditions will be covered.  Yet another thing we don’t know (“hard-to-predict”) is how much this will cost.  Normally, businesses–and especially insurance companies with their actuarial charts and calculations–would need to have those figures.  I doubt that $63 dollars per insured person would come anywhere near paying for the nation’s pre-existing conditions.  But at least something is budgeted for it.  Still, this amounts to a tax on everyone with health insurance, whether paid by the company or the insured.  I believe we were told that taxes would only go up for the wealthy.

HT:  Jackie

Short sellers’ fiscal cliff

The Bush tax cuts aren’t the only measures that expire on New Year’s Day.  So will the Mortgage Forgiveness Debt Relief Act of 2007.  Without that law, homeowners who have negotiated a short sale–that is, have part of their mortgages forgiven by the lender because they are so far underwater when they sell their home–will have to count the amount chopped off their mortgage as income for tax purposes.

Say a person owes $200,000 on his house but it’s only worth in today’s market for $100,000.  If the mortgage is held by the federally regulated lender Fannie Mae or Freddie Mac, there is a federal program that makes it possible for the underwater amount to be forgiven when the home is sold at market value.  So in a short sale, the person might be able to sell the home for $100,000 but be clear of the mortgage.  But after New Year’s Day, he will have to declare the $100,000 that Fannie Mae wrote off as if it were money that he actually received.  And then pay taxes on it!

Various bipartisan bills have been proposed to extend the Mortgage Forgiveness Debt Relief Act, but no votes are scheduled, and it isn’t part of the package that either side is proposing in the fiscal cliff negotiations.

 

via Short sellers may be hit with big income tax bills if Washington doesn’t act – The Washington Post.


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