Evaluating the Impact of the "Fiscal Cliff" Legislation

Last week, President Obama signed into law the American Tax Relief Act of 2012 (ATRA), preserving many federal income tax provisions that were due to expire on January 1, 2013. At the same time, ATRA does make some changes to other provisions that may be of particular interest to our clients:

Employee Share of Social Security Contribution Returns to 6.2%: Employers and employees have traditionally split the 12.4% Social Security payroll tax (which, along with the Medicare tax, is also known as the "FICA tax.") Employees would pay 6.2% and employers would pay the other 6.2%. As a stimulus measure, the employee share was reduced to 4.2% in 2011 and 2012. ATRA did not renew this reduction for 2013, however, and the result will be a noticeable reduction in take-home pay. The good news is that employees who participate in tax-advantaged plans such as health FSAs, dependent care plans, and commuter reimbursement accounts can minimize the effect of this tax on their paychecks by reducing their taxable income.

Transit Reimbursement Increased to $240/Month: As we have already announced, Commuter Reimbursement Account (CRA) participants will be able take advantage of the return of "transit parity," which brings the available reimbursement amount for mass transit expenses into line with the limit for parking expenses. The 2009 stimulus bill originally put "transit parity" into effect but the provision expired at the end of 2011. ATRA has revived it for 2013. A strict reading of the ATRA transit provision indicates that it is effective for 2012 as well, but it is presently unclear how this can be administered on a retroactive basis. We are awaiting IRS guidance on this issue and recommend that our clients do the same.

Tax Rate Increase for High-Income Earners: While ATRA renewed almost all of the previously existing tax rates, the rate for individuals making over $400,000 a year ($450,000 for families) will increase from 35% to 39.6%.

Adoption Assistance and Educational Benefits Preserved: Tax breaks for employer-provided adoption assistance and certain educational benefits (up to $5,250 a year) that were set to expire have now been made permanent.