January 5, 2013 |Brent Hunsberger, The Oregonian
From afar, cliffs can be beautiful, awe-inspiring. Up close, they’re jagged, intimidating and dangerous.
What Congress did last week to avert the fiscal cliff works just the opposite. For now, the vast majority of taxpayers will find nice windfalls, immediate relief. But down the road, we or our children could end up paying dearly.
But forget delaying gratification, the hallmark of a good saver. Families, employees, young and old all have something to gain — some of it permanently — from the American Taxpayer Relief Act of 2012.
Yes, every worker saw their two-year, 2 percentage point Social Security tax break disappear, trimming their take-home pay.
Yes, the uber-rich will pay a lot more in income, payroll, capital gains, dividend and estate taxes.
But our lawmakers could have chiseled A LOT more taxes out of the rest of us.
“They punted,” said Greg Rogers, an accountant with Rogers Financial Services in Oregon City.
They left intact for another year many individual and business tax breaks they could have easily let expire. And they made others permanent — not only Bush-era tax cuts, but, stunningly, measures intended to be economic stimuli during the fallout from the recession.
“Basically, George Bush wins,” said Joseph Anthony, a licensed tax consultant in Portland.
Among the prettiest gifts: breaks for those in the 10 percent and 15 percent tax brackets. In 2012, that means singles with taxable income after deductions of $35,350 or less ($70,700 or less for joint filers).
Before 2001, the 10 percent tax bracket didn’t exist. It was supposed to expire this year, raising taxes on a whole lot of middle-class families. Instead, it’s now locked in law, not subject to sunsets or late-night dealmaking.
What’s more, taxpayers in these lowest brackets will no longer pay ANY tax on capital gains or dividends until further notice. Nothing.
Sure, mostly wealthy taxpayers reap the gains of dividends and stock sales. Still, this break will provide relief to scores of seniors on fixed incomes.
Consider this estimate from the nonpartisan Tax Policy Center. A retired couple bringing in $52,500 a year, most of it from Social Security and a pension but $3,000 of it from dividends, would have owed $1,300 in 2013 in federal taxes without the fiscal-cliff deal. Now they might owe only $350.
That savings is worth a trip to the Grand Canyon.
Who else made out well?
Families: The $1,000 child-care tax credit was extended through 2017, as were enhancements to the Earned Income Tax Credit. Both are key forms of relief for working-class families and the poor. The credit, in particular, was part of welfare reform of the 1990s.<.p>
Had Congress done nothing, a family with two children under 13 making $75,000 a year would have paid $5,000 in federal income taxes in 2013, according to the Tax Policy Center. With the fiscal-cliff deal, they’ll owe $3,100.
That difference is worth a new fridge and dishwasher in my house.
Employees: Time to ask your boss for better benefits.
Congress made permanent tax breaks for employers who pay for worker education costs, buy and operate child-care facilities, offer child-care resource and referral services, and foot up to $10,000 of adoption costs.
And through 2013, the amount workers can set aside tax-free each month in their commuter flexible spending arrangement (FSA) to cover public transit fares goes from $125 to $240.
Washington residents: Your itemized deduction for sales taxes returns 2012 and 2013. It had expired at the end of 2011.
The Roth 401(k): It’s also time to ask for this option in your workplace retirement plan.
In an attempt to raise more revenue now, Congress agreed to allow 401(k), 403(b) and 457(b) account holders to convert to a Roth while still working. It’s one of the biggest surprises of the deal.
“I don’t know of any constituency I follow that was advocating for it,” said Rick Meigs, president of 401khelpcenter.com in Portland. “To me, it just kind of popped up out of thin air.”
Previously, this had been all but impossible to do while still working. But the act removed all restrictions. Anybody at any time, assuming the plan allows it, can make an in-plan conversion.
This option won’t make sense for a lot of workers. You’ll have to treat any amount you convert as income in the year of the conversion, meaning you’ve got to have cash on hand to foot the tax bill on that amount.
This could push you into a higher tax bracket if you’re not careful. A partial conversion might be best, said Joe Alfonso, a certified financial planner and tax consultant at Aegis Financial Advisory in Lake Oswego.
What’s more, most older workers will be in a lower tax bracket when they retire.
But for younger workers who expect to earn their way into a higher tax bracket, this is a good option to consider. You have decades to grow your money tax-free. Then, in those distant retirement years, all your withdrawals will come out untaxed.
“It just gives people more flexibility, and flexibility is a good thing,” said Bruce Miller, a certified financial planner in Vancouver.
For instance, you can stash a lot more into a Roth 401(k) ($17,500 in 2013, plus $5,500 for those 50 or older) than you can a Roth IRA ($5,500 in 2013, or $6,500 if 50 or older).
You generally can’t take money out of a Roth until five tax years after your first contribution, IRS rules say. However, if your plan allows you to pull money out for a hardship before you reach age 59.5, the portion known as basis — a ratio of your original contribution — can come out tax-free. Only your earnings would be taxed.
In addition, if you roll your Roth 401(k) into a Roth IRA when you leave your employer, you won’t have to take required minimum distributions after age 70.5. In fact, you can easily pass the Roth IRA to heirs.
Just remember, you’ll have to roll the money out of the 401(k) plan and into an IRA to avoid the minimum withdrawal requirement.
But first, your employer needs to offer the Roth 401(k) as an option to allow this conversion. Most don’t. Ask yours to add it. Employers might also need to amend their plan language to allow for the conversions, experts say.
So it might be awhile before this perk is available.
Then again, good things come to those who wait.