Congress is scheduled to return Thursday, with one of its top priorities a deal to avert the December 31 “fiscal cliff” deadline of looming tax increases and automatic spending cuts, but it will need to work quickly or reach some type of interim agreement.
“While a deal looked close on several occasions during negotiations, it’s been elusive so far,” said CCH senior federal tax analyst George Jones. “Whether a resolution can be reached before Congress recesses for the year grows dimmer as the days progress.”
The fiscal cliff, shorthand for Jan. 1, 2013, when the terms of the Budget Control Act of 2011 are scheduled to go into effect, includes a series of across-the-board spending cuts and tax increases.
According to CCH, three scenarios that could transpire over the next few days include:
• A full resolution is reached. The Presidential and Senate Democratic proposal and the Republican plan still remain miles apart. Most attention has focused on the divide between the tax increases in the Democratic proposal on incomes of more than $200,000 for single filers and $250,000 for joint filers; and the spending cuts in the Republican proposal, particularly to entitlement programs.
“Last week it seemed President Obama and House Speaker Boehner were circling in on a middle ground, but that fell apart and it’s not clear they will be able to return to those positions to resume negotiations this week,” said Jones.
The President had mentioned being open to a $400,000 threshold on income tax rates at one point.
• An agreement “in principle” with details worked out in 2013. A full resolution would require reaching an agreement, finalizing the bill and getting it voted on in both the House and Senate. That may not be possible with the time left, however.
“They could pass legislation establishing a framework of general tax increases and/or spending cuts and allow the new Congress to work out the details early next year,” said Jones.
• No agreement is reached and the Bush-era tax cuts fully expire. Not only would this increase taxes across the board based on income, it also would make an estimated 20 million additional families subject to the alternative minimum tax, raise the capital gains rate and tax dividends as ordinary income. In addition, the child tax credit would be cut in half to $500 from $1,000 and the estate tax would revert to 55 percent with a $1 million exemption amount compared to 2012’s 35-percent maximum estate tax after a $5.12 million exemption, among other tax impacts.
“Even if we go over the fiscal cliff, Congress could act early next year to reach a compromise and make any agreement retroactive to the beginning of the year,” said Jones. “However, this would not be the ideal scenario for most taxpayers, businesses or investors—most of whom would prefer some degree of certainty heading into 2013.”
Tax Outcomes for Middle-class Couples
Depending upon the taxpayer’s situation, the different proposals could have an impact of a few hundred dollars to several thousand dollars in the taxes they owe.
The free CCH 2013 Fiscal Cliff Estimator allows individuals and tax advisors to compare a taxpayer’s 2012 tax liability against the two proposals as well as what would happen if Congress does not act.