Averting the Fiscal Cliff – What Does it Really Mean?
All anyone was talking about in the last days of 2012 was whether Congress and President Obama would work together to avoid an increase in taxes caused by the expiration of a number of tax breaks dating back to President Bush. An agreement was reached at the 11th hour. But what does it all mean? And how does it affect seniors?
First let’s talk income taxes. The President and Republicans reached a compromise, raising the tax rate on individuals earning more than $400,000 and married couples making more than $450,000 from 35 to 39.6 percent. Payroll taxes will increase as well, back to 6.2 percent, for all wage earnings up to $113,700 in 2013. The past 2 years saw a 2 percent reduction in mandatory contributions to the Social Security program. While this will impact 160 million American employees it won’t affect most seniors who are retired.
There was much speculation on the federal estate tax exemption and whether the $5,000,000 exemption would expire and return to $1,000,000. Remember, at the end of 2010 we went through this when there was no federal estate tax and we waited to see if that law would expire and return the exemption to $1,000,000. Well, this time, lawmakers decided to make the $5,000,000 exemption permanent . That means we won’t automatically have to go through this insane process every two years of watching to see what Washington will do at the last minute. Actually, the exemption, which is currently $5,120,000, is indexed for inflation and will rise year to year. What Congress did do was raise the federal estate tax rate from 35 to 40 percent.
Another change for 2013, recently announced by the IRS, is that the annual gift tax exclusion, that amount that can be gifted annually per person without paying gift tax or using one’s lifetime exemption of $5,120,000, will rise from $13,000 to $14,000. New Jersey does not have a gift tax and its estate tax remains at $675,000.
Another change that threatened to impact seniors was avoided for at least another year. Congress agreed to a one year extension of current Medicare reimbursement rates, avoiding what would have been a 27 percent cut in reimbursement rates for doctors participating in Medicare.
So, there you have the highlights of the law. Looking at the bigger picture, the politicians in Washington haven’t tackled the bigger problems we are wrestling with such as the economy, budget deficits, and growing government spending. But, in the short term, a financial crisis has been averted.
Next week I’ll discuss some of the change in the programs that most affect seniors, ones we, as elder law attorneys work with frequently, Medicaid and VA benefits. Stay tuned.