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When Congress went home for Christmas, leaving the “fiscal cliff” hanging, I heard the news folks say that there’s still time, even if it takes a week or so into 2013. So this is a cartoon cliff, where if the character realizes he’s gone off in time, he can just scramble back with no harm.
So they passed a bill right after the new year, and had the nerve to name it with a 2012 date. Hurrah, they did it! Unfortunately, not everyone could handle the cliff hang time.
First, let’s cover some background. An earlier deal fell apart because the Republicans would not accept tax increases and the Democrats’ spending reductions were too small to appease the Republicans.
Now I know you think I mean the pre-Christmas deal. But the deal I described is the November 2011 “supercommittee” failure that led to the fiscal cliff tax increases and spending cuts.
Congress had about 12 months before the 2012 elections to avoid the cliff. So nothing was done, with both parties waiting for the elections to see what advantage they might obtain. The election came and went, and nothing changed.
The IRS kept telling Congress the problems that would result from not setting the (tax) rules until after the (filing) game has started. Well, we now “fixed” the alternative minimum tax and set the rates, so the IRS needs some idle Santa elves to work the magic required to get their work done in time for filing season.
Sort-of rich people are a bit put out also. My calls at the office are routed through a reception desk, so I can be told things like, “Jim, there’s a millionaire on the line.” OK, so not exactly, but in a way.
Here’s the truth. Through the end of 2012 a person could transfer as much as $5,120,000 without paying a gift or estate tax. But as the cliff approached, we all knew this could fall to $1 million in 2013. And the rate of tax could rise from 35 percent to 55 percent for taxable transfers.
So anyone with a net worth of $1 million or above had to think about making gifts to their heirs at the end of 2012, even if they were not quite ready to do so. These are the millionaires that called. Not the super rich, just the sort-of rich.
I know a lot of Albuquerque people who gave money or property to their kids at the end of 2012 just to avoid the risk that we could go over the cliff. There is no hope for them to reverse these actions now that the 2012 estate tax rules have been permanently extended. The inability of Congress to do its job had real consequences for them.
I also heard that charities did relatively well at year-end, because there was concern that tax reform might decrease the benefits of charitable giving in exchange for lower tax rates. This actually inspired giving at year-end.
Frankly, the notion that our elected leaders could get together for tax reform in 2013, with or without some reductions in benefits for charitable giving, strikes me as a bit far-fetched. But apparently the general confusion of what our tax laws might look like led to a late-year surge in giving.
Well that’s good, you say. But if 2012 tax uncertainty was the reason for increased giving, then it would just be a timing issue. Giving in 2013 may then decrease if tax uncertainty just accelerated giving into 2012.
Payroll tax people ended 2012 not knowing if the 2 percent “temporary” payroll tax reduction for employees will still be temporary. And it was not clear what the withholding rates would be when paychecks start to be issued in 2013. A late cliff solution offers little solace for the small payroll department.
The fiscal cliff “solution” solved none of our real problems. I find relief in only one area – I was sure that we would have to hear the back slapping when our leaders “solved” the crisis. But it looks like even both parties realize they just proved the old adage that you don’t want to know how laws and sausages are made.
James R. Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.<br>
