Federal tax legislation this year is likely to be influenced by several factors--the presidential and congressional election results, the outcome of last year's budget negotiations and concerns about slow economic growth, high unemployment and large federal budget deficits. There are growing expectations fundamental tax reform could be enacted in the near term to address some of these economic and budget concerns.
The November 2012 elections mark a continuation of divided government, with President Barack Obama winning a second term, Democrats somewhat increasing their majority in the Senate and Republicans maintaining control of the House with slightly fewer seats. It is unclear whether the president's relationship with Congress in his second term will be characterized by renewed partisan gridlock or bipartisan compromise.
One thing seems clear: as a result of the November elections, the 2010 health care law (the Affordable Care Act) is unlikely to be repealed or significantly changed in the near term and instead will continue to be implemented as scheduled. At the same time, Congress may consider legislation to modify how certain aspects of the law are implemented.
Beginning this year, the Affordable Care Act increases the employee portion of the Medicare hospital insurance (HI) tax by an additional 0.9 percent on wages received in excess of a certain amount ($200,000 single and $250,000 for a married couple filing a joint return). Separately, the act imposes a new 3.8 percent tax on the lesser of net investment income or modified adjusted gross income (AGI) over a certain amount ($200,000 single and $250,000 for a married couple filing a joint return).
As of this writing, President Obama and congressional leaders from the two political parties were engaged in year-end negotiations to avoid the so-called "fiscal cliff" significant tax increases and spending cuts scheduled to take effect beginning in January 2013.
Fiscal cliff items include the scheduled expiration of the 2001 and 2003 individual tax cuts and estate tax relief; the implementation of taxes in the 2010 health care law; the expiration of a two-percentage point reduction in the employee payroll tax rate from 6.2 percent to 4.2 percent; the termination of emergency unemployment benefits; the activation of automatic, across-the-board spending cuts (sequestration); and the expiration of a temporary moratorium ("doc fix") on scheduled reductions in Medicare...