On January 1st, 2013, the United States Senate handed the government a parachute just as it was falling over the cliff.  Working into the wee hours of the morning, Senate Republicans and Democrats came to an agreement to raise taxes on individuals making more than $400,000 and married couples earning over $450,000.  Upon passing the American Taxpayer Relief Act of 2012 (H.R. 8) by a vote of 89-8, the Senate handed the keys over to the House.  After hours of tense negotiations and closed-door meetings, enough House Republicans joined Democrats to pass H.R. 8, 257-167.

In passing the American Taxpayer Relief Act, 125  members of the GOP defied the notion that the Republican party would ever raise taxes again; choosing spending cuts over revenue to tackle the growing national debt.  While Republicans were forced to compromise  so too were Democrats and the White House.  Gone was the promise of raising taxes on individuals making over $250,000, gone was the proposed increase to the estate tax, and gone was the leverage created by the specter of another recession.

The fiscal cliff averted, talk has turned to the fight that will ensue as Congress debates raising the nation’s borrowing limit.  As Representatives and Senators begin those negotiations, members of the LexBlog Network have spent the past week analyzing the fiscal cliff deal from every angle.  From debating the “trademark-worthiness” of “fiscal cliff” to discussing the impact of the deal on special diabetes programs, if you have a question about the fiscal cliff, you can find the answer here.

To walk us through the specifics of the the American Taxpayer Relief Act, we head over to The Venture Alley where Asher Bearman has provided us with the cliff-notes version of the bill:

  • The 2001 individual tax rates are made permanent, except that the highest rate, 39.6 percent, starts at US$450,000 in taxable income for married filing jointly, US$400,000 for individuals.
  • Tax rates of capital gains and dividends are set permanently at 15 percent, and 20 percent for those above the thresholds at which the individual 39.6 percent rates start.
  • The estate tax rate goes up to 40 percent with a US$5 million exemption (US$10 million for married couples).
  • The limitations on itemized deductions and personal exemptions phaseout for high earners are restored at US$250,000 for individuals and US $300,000 for married filing jointly.
  • The alternative minimum tax “patch” to keep middle class taxpayers from paying the AMT is enacted permanently (previously the patch had to be renewed yearly).
  • The Senate Finance Committee package extending most expired and expiring provisions through the end of 2013 is adopted as part of the bill.
  • Bonus depreciation at 50 percent is extended at 50 percent.
  • The payroll tax cut enacted in 2010 is allowed to expire, but long-term unemployment benefits are extended for a year.

To read a more comprehensive overview of the act, I recommend checking out either Jack Howell’s post on the Tax Law and Business Organization Strategy or Jerald August’s post on Fox Rothchild’s Federal Taxation Developments Blog.

While much of the coverage in the mainstream media has focused on the tax increases, alternative minimum tax patch, and payroll tax cut, the impact of this deal reaches beyond the average person’s tax return. The health care industry faces a number of new challenges with a delay in planned cuts to Medicare payments to physicians.  These cuts were part of the Balanced Budget Act of 1997, and their delay will cost an estimated $25 billion. As Bette Bradely reports on the Health Care Business & Legal Insider, hospitals continue to be frustrated by Congress’s inability to solve a problem that has plagued the industry for over ten years:

“The Federation of American Hospitals explained in a statement on December 31st that hospitals understand “the necessity for Congressional action to avoid a dive off the fiscal cliff. However, we are disappointed that in cliff avoidance, scarce hospital finances would be used to offset the Medicare physician payment fix.  It is not in the best interest of patients or those who care for them to rob hospital Peter to pay for fiscal cliff Paul. These cuts could impact hospital services for those who need them the most.”  Nevertheless, it would appear that hospitals will continue to be asked to bear the burdens of the health care fiscal crisis; will we soon see hospitals having to reduce operations or close due to these financial burdens?”

The renewable energy and construction industries were also effected by provisions in the American Taxpayer Relief Act.  Industry members stand to gain from an extension and alteration of the Production Tax Credit (PTC) and home energy efficiency tax credits.  Greg Jenner has more on the changes made to the PTC on Renewable + Law:

“Previously, whether a facility qualified for the PTC depended on when the facility was placed in service for federal income tax purposes. That provision has now been changed so that a facility will qualify for the PTC if construction with respect to the facility begins on or before January 1, 2014. This change applies to all renewables (biomass, marine and hydrokinetic, landfill gas, trash, hydropower) to which the PTC applies (not just wind), with the exception of refined coal and Indian coal. In other words, there is no longer a placed in service deadline for purposes of the PTC if construction begins before January 1, 2014.”

And Shari Shapiro covers the revival of two tax credits for energy efficient residences that had expired December 31st, 2011:

“The Act reinstated and extended the 26 U.S.C. §45L business tax credit of up to $2000 for contractors or developers that construct or significantly renovate “dwelling units” (apartments, condos or single-family homes) that meet certain energy efficiency standards.

….

In addition to extending the credit, the Act changed the baseline of energy efficiency required to qualify. Previously, §45L required a 50% reduction in energy usage as compared to the 2003 edition of the International Energy Conservation Code (IECC). The Act amended the baseline energy standard to reference the 2006 edition. “

Even charitable organizations will face some consequences as a result of the fiscal cliff deal.  Elizabeth Mills, senior counsel in Proskauer Rose’s Chicago office, covers a few things charities should be paying attention to as they file their taxes on the firm’s Not For Profit/Exempt Organizations Blog:

“Several provisions, however, will be of interest to tax-exempt organizations: the extension of several incentives to make certain charitable donations; the return of deduction limitations for certain individuals, including the charitable deduction; the absence of new limitations on tax-exempt financing; and the end of grants and loans to co-op nonprofit insurers exempt under the new provisions of Section 501(c)(29) of the Internal Revenue Code.”

With so much going on in the American Taxpayer Relief Act it’s a shame there isn’t more time to pour over the act’s surprisingly short 59 pages.  Unfortunately, as many LXBN authors were quick to note, stopping the fiscal cliff was just step one.  Negotiations over the debt-ceiling are ramping up, and if Dan Lesser is correct, Republicans are going to be looking for some major compromises from the Democrats this time around:

“The last time Congress had to raise the debt ceiling, in 2011, House Republicans insisted on a dollar-for-dollar reduction in spending, resulting in $1.5 trillion in spending cuts. The House Republicans have vowed that they again will use the need to raise the debt ceiling as leverage to exact huge spending cuts. This is a potent weapon, since failure to raise the debt limit would cause the United States to default on its obligations, with catastrophic consequences for the worldwide financial system.

Fortunately, for those of us that aren’t members of Congress, life will continue through even the most contentious of negotiations.  As Cordell Parvin tries to convey in his post, the important thing for anyone to do, laywer or not, is to not get bogged down in the daily minutiae of Congressional bickering, but instead to look ahead and plan for the future:

“Has your law firm thought about what will happen in the next 90 days? How will your clients and how will your practice be impacted if the debt ceiling is not increased? Will the impact be any different if it is increased and spending cuts are put in place? Will the impact be any different if it is increased and no spending cuts are put in place?”

Given how little control we have over what goes on inside the Beltway, Parvin’s point is well-taken.  Plan, don’t react.

To read more analysis on the fiscal cliff deal check out LXBN’s tagged and curated section here.