Academic journal article Journal of Accountancy

Facing the Tax Cliff: Surprising Number of Tax Changes Loom as Year End Approaches

Academic journal article Journal of Accountancy

Facing the Tax Cliff: Surprising Number of Tax Changes Loom as Year End Approaches

Article excerpt


You can't pick up a newspaper or go online this fall without seeing stories about the coming "tax cliff" or "taxmageddon"--the time at the end of this year when the current tax rates for income, capital gains, gifts, and estates are scheduled to expire. Mostly overlooked by the news media are a large number of other tax provisions that are also scheduled to expire or have already expired.

The country faced a similar situation at the end of 2010, when, after having had nine years to prepare for the sunset of the lower income, estate, and gift tax rates enacted m the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), PL. 107-16, and seven years to prepare for the sunset of the lower capital gains tax rates enacted by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), P.L. 108-27, Congress had to scramble to prevent the rates from rising. The House and the Senate finally enacted a short-term solution in mid-December 2010 in the form of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act), P.L. 111-312, which extended the ordinary income tax rates and the capital gains tax rates, reinstated the estate tax at a reduced rate, and extended a large number of expired or expiring provisions.

This year the country faces the same prospect. Many of the 2010 Tax Relief Act extensions expired at the end of 2011, and the rest expire at the end of this year. This article details what has expired and will expire if Congress does not act.

What Congress's solution will look like was still hard to gauge as this article went to press, and it will depend to a large extent on the results of this month's presidential and congressional elections, which could affect tax law for years to come. And while the major parties have expressed strong positions on which income tax brackets should or should not be extended and for whom, they have largely been quiet on issues such as the estate and gift tax rates and the various other expiring tax provisions.

In August, the Senate Finance Committee approved a bill, the Family and Business Tax Cut Certainty Act of 2012, that would extend some, but not all, of the expired provisions through 2013. This may signal that, when Congress does act, it will not extend every expired provision because of the cost m lost federal revenue. Tax provisions for individuals that the bill focused on included restoring the alternative minimum tax (AMT) patch, the deduction for state and local sales tax, and parity for employer-provided mass transit and parking benefits. Provisions for businesses included extending the research and development credit, the work opportunity credit, and the increased Sec. 179 expensing amounts. In all, the bill would extend or restore 11 provisions for individuals, 28 for businesses, and 13 energy incentives. It did not address the impending changes to income, estate, and capital gains tax rates.

The Joint Committee on Taxation estimated that renewing even this smaller list of provisions would cost more than $192 billion in lost revenue from fiscal year 2013 through fiscal year 2017 (Joint Committee on Taxation Rep't No. JCX-70-12 (Aug. 2, 2012)). The fate of this bill is hard to predict.


Tax rates. EGTRRA introduced a new 10% tax bracket below the 15% bracket for individuals and reduced the other tax brackets to 25%, 28%, 33%, and 35%. Those changes are scheduled to sunset after 2012 so that in 2013 the 10% rate will disappear (with income in that bracket reverting to the 15% bracket) and the other rates will revert to 28%, 31%, 36%, and 39.6%, respectively.

In 2003, JGTRRA also lowered the capital gains tax rate to 15% (0% for taxpayers in the 10% and 15% income tax brackets). These rate changes are also scheduled to expire after 2012. The rates will revert to 10% for taxpayers in the 15% income tax bracket and 20% for other brackets (8% or 18% for property held more than five years (but to qualify for the 18% rate, the holding period must begin after Dec. …

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