Latest News

Fiscal Cliff Legislation Avoids Massive Tax Increases

Jan 10, 2013

On December 31, 2012, the Senate voted overwhelmingly on a bill to prevent the expiration of most of the 2001 and 2003 tax cuts that had been first extended in 2010. The House followed suit on January 1, 2013, which avoided the “fiscal cliff” the country faced if no agreement was reached.The Bill is expected to raise about $600 billion over 10 years and delays (for two months) dramatic, across-the-board cuts to the budgets of the Pentagon and various other government agencies. Of particular interest to dealers in the legislation:? The estate tax is set at a permanent rate of 40%, with a $5 million per spouse exemption, indexed for inflation. This is significantly more favorable than the $1 million exemption and 55% rate that would have become law without Congressional action. The law preserves indexing of the exemption as well as portability of the unused exemption between spouses. Additionally, other estate planning techniques such as valuation discounts were not changed by the law.? The law increases marginal rates on adjusted gross income above $400,000 ($450,000 for married couples filing jointly), but permanently retains all other personal income tax rates from the 2001 law.? The new law sets capital gains and dividends at 20% for the higher income brackets and 15% for all other individual taxpayers.? The Alternative Minimum Tax will be permanently patched.? 50% bonus depreciation was extended for 2013, which should boost sales of business-use vehicles, and help dealers in purchasing equipment for their dealerships.? Repeal of the LIFO accounting method was not included in the bill.

New-car sales have been a boost to the economy, which would have been threatened if Congress hadn’t acted and would have resulted in both tax hikes and spending decreases. According to NADA Chief Economist Paul Taylor, the passage of the “fiscal cliff” legislation allowed Congress to avoid raising taxes on 96% of American workers.But this is only the beginning. In the coming weeks and months, there will be serious debates on taxes and spending, as well as an increase of the debt ceiling.NADA expects that, while car and light truck sales continue to outperform most of the economy, government spending cuts expected in the coming months may impact the purchase of vehicles by federal and other levels of government.Passage of the “fiscal cliff” legislation, which prevented a massive tax increase for 96% of U.S. workers, lessons the chances of the U.S. economy returning to recession in the coming months, but the upcoming debates on taxes and spending will provide both challenges and opportunities for dealers.