By J. Haden Werhan, CPA/PFS
November 19, 2012
We have two people to thank for the term “fiscal cliff”: Alec Phillips, a Goldman Sachs economist, and Ben Bernanke, the Federal Reserve Board chairman. The bottom line is that if nothing is done legislatively before the big ball drops over Times Square on New Year’s Eve, we will have driven off the fiscal cliff just as Susan Sarandon and Geena Davis did in the final scene of Thelma & Louise. Fortunately, Congress is no stranger to retroactive tax legislation, so the reality is that if they hit the rewind button, Thelma & Louise could magically fly back up to solid ground, surrender to detective Hal Slocum (Harvey Keitel) and face the consequences of their actions. What a novel concept!
The fiscal cliff is the culmination of three primary laws:
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010: This act extended the Bush tax cuts that were set to expire in 2010 for two years, “patched” the AMT exemptions for one year, and created the 2% reduction in Social Security Tax – also for one year.
The Bush tax cuts were enacted in 2001 and had an end date certain of December 31, 2010. There are numerous moving parts but they primarily lowered tax brackets and gave back certain deductions that previously would phase out as one’s income went up. The tax brackets were lowered for everyone and the top bracket was reduced from 39.6% to 35%. The patch to the Alternative Minimum Tax essentially reduces the burden of AMT for those tax payers affected. The AMT is a mystery for most people. It was enacted in 1969 to ensure that everyone paid some tax. Wealthy folks back then could purchase any number of “tax shelters” to avoid paying tax. Believe it or not, it only targeted about 100 taxpayers when conceived! Not being indexed for inflation, this parallel tax system now affects millions of taxpayers – primarily those who itemize their deductions including state income and real estate taxes. The 2% Social Security (Payroll) tax reduction changed the tax from 6.2% to 4.2% for employee tax payers and from 12.4% to 10.4% for the self-employed of the first $106,800 earned.
The Budget Control Act of 2011: This act provided for an increase to the federal spending limit so the government was able to avoid shutting down. It also created the “Super Committee,” or The Joint Select Committee on Deficit Reduction, whose job it was to create spending cuts of $1.2 Trillion dollars over a ten-year period. A safety valve in this legislation provided that if the Super Committee failed in its task (which it did), automatic spending cuts would take place. These cuts are known as “Sequestrations” and provide for spending cuts across the board, totaling $110 billion per year between 2013 to 2022, split evenly ($55 billion each) to defense and non-defense discretionary spending.
The Middle Class Tax Relief and Job Creation Act of 2012: Essentially, this bill extended several things, including unemployment benefits, Medicare payments, temporary assistance to needy families (TANF), FEMA benefits to victims of natural disasters, and also the 2% Social Security tax reduction on earnings up to $110,100 in 2012.
RELATED: Gerlach medical device tax
There have been other laws enacted in the past two years containing a variety of tax provisions. Of note for dentists in private practices, the Small Business Jobs Act of 2010 was enacted on September 27, 2010. It extended provisions for the immediate deduction of equipment purchases, including Bonus Depreciation and Section 179. Currently, Bonus Depreciation provides for the deduction of 50% of the cost of new equipment in the year of purchase. It was created after 9/11 to help with rebuilding efforts. Section 179 has been around since 1958 and allows one to deduct 100% of the cost of equipment up to an annual limit. The amount of typical dental equipment purchases not deducted under Section 179 may be written off (depreciated) over five years. Bonus Depreciation goes away in 2013 and Section 179 is reduced from the current limit of $134,000 to $25,000. This is why your friendly dental suppliers are encouraging equipment purchases before the end of 2012. There is also the .9% High Income Hospital Insurance tax on earned income over $250,000, the Medicare tax of 3.8% on investment income for those earning over $250,000 and the mysterious 2.3% excise tax on manufacturers and importers (dentists?) of certain medical devices – all part of the health insurance legislation (Obamacare) which is already a certainty.
So what is really going to happen on January 1, 2013? The Congressional Budget Office warns of an increased risk of recession if nothing is done, while at the same time stating that lower national debt and budget deficits would be good in the long term. The newly re-elected president has met with congressional leaders to discuss the impending tax increases and spending cuts. The real question is whether or not they can get together and craft legislation that will bring us to a fiscal slope as opposed to the fiscal cliff that has been so pervasive in the news since the elections.
Nobody knows what will happen, but of one thing we may all be certain. There will be plenty of speculation of doom and gloom and countless recommendations for solutions from every political point of view between now and the end of the year. For me it is very reminiscent of the days leading up to December 31, 1999 when speculation that computers around the world were going to crash when January 1, 2000 arrived. Can you spell Y2K?
Feel free to contact J. Haden Werhan, CPA/PFS, principal and owner of Thomas Wirig Doll, an accounting and wealth management firm that works with dentists. He can be reached at [email protected] or (877) 939-2500.