With the ink now dry on The Taxpayer Relief Act of 2012 (passed in early 2013) which, among other things, raised the capital gains tax rate from 15% to 20% and the top income tax bracket of “high income” Americans from 35% to 39.6%, Senate Democrats have now proposed the “American Family Economic Protection Act” which defers the sequestration for the remainder of 2013 by (i) raising the income tax on millionaires ($55 billion over 10 years), (ii) increasing future military cuts ($27.5 billion) and (iii) cutting farm subsidies by $31 billion (and funding $3.5 billion for certain farm programs that are currently unfunded). There is also a token $1 billion tax on companies exporting jobs and $2 billion of taxes on oil from tar shale - supposedly to support the “oil spill liability trust fund."
Long-term tax increases are proposed to achieve a postponement of dealing with underlying problems and deferring addressing entitlement spending for ten months.
Although the specific legislative language has not been circulated, the summary calls for an effective 30% average tax rate on combined income tax, alternative minimum tax, and the employee’s portion of the payroll tax for individuals with adjusted gross income (less charitable contributions), phased in between $1 million and $2 million of adjusted gross income. The 3.8% excise tax on investment earnings will not be counted in computing the average tax rate if the technical description of the proposed legislation is correct. Although detailed revenue estimates have not been provided, it is anticipated that the bulk of the increased taxes will fall on dividends and capital gains. Those fortunate enough to have very large capital gains in a given year (such as people selling a business) will have the income tax increase on such gains from 20% to 30% and perhaps an increased actual tax liability (income tax and excise tax) from 23.8% to 33.8%. Since the effective rate is computed on adjusted gross income, it appears that any itemized deductions (other than the remainder of the charitable contributions that were not phased out under existing law) will be totally lost.
The Senate is expected to take up the measure the week of February 25 after returning from the President's Day recess. It is not anticipated that if such legislation were to pass the Senate it would pass the House, but it underlines that taxes are unstable and likely to rise and the difficulty that meaningful spending reform faces.
Read the unofficial summary of the legislation here.
Should you have any questions, please do not hesitate to contact Leigh Griffith, or any of Waller’s Tax Group members.
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