Saved By the “Fiscal Cliff” Bell

By Dennis Zuehlke, Ascensus

As most Americans were ringing in the New Year, the Senate was holding an early morning roll call vote on a bill to avoid hurtling off the “fiscal cliff” that would have resulted from the expiration of the Bush-era tax rates and spending cuts mandated by the Budget Control Act of 2011. The compromise bill, hammered out over the weekend by Senate Minority Leader Mitch McConnell (R-KY) and Vice President Joe Biden, passed the Senate by a vote of 89-8. The House passed the measure by a vote of 257-167 later on New Year’s Day, pulling us back from the brink, and saving us from falling off the fiscal cliff.

President Obama then signed into law the American Taxpayer Relief Act of 2012 (ATRA), making permanent the Bush-era tax rates (except for individuals with incomes above $400,000 and families above $450,000), postponing for two months the automatic across-the-board spending cuts mandated by the Budget Control Act of 2011, and extending a host of other expiring individual and business tax provisions.

As one would expect, the bill contains something for everyone, including those who are saving through retirement and education savings plans. Credit unions offering IRAs and Coverdell education savings accounts (ESAs) will benefit from three provision of the bill.

EGTRRA Coverdell ESA Provisions Made Permanent

ATRA makes permanent the Coverdell ESA provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that were set to expire on December 31, 2012. These include the current Coverdell ESA contribution limit of $2,000 per year, higher income thresholds for contribution eligibility, ESA contribution deadline, ability to make ESA contributions after age 18 for special needs individuals, allowing non-person entities to make ESA contributions, treating elementary and secondary school expenses, as well as computer and related technology expenses as qualified education expenses, and certain provisions related to American Opportunity and Lifetime Learning credits and state qualified tuition programs. As a result, there are no changes to ESAs and the accounts will operate permanently under the rules that were in place for 2012.

Qualified Charitable Distributions Extended Through 2013

ATRA also extends qualified charitable distributions (QCDs) from Traditional and Roth IRAs for two years: December 31, 2011, through December 31, 2013. This popular tax break expired at the end of 2011 when Congress failed to act on bills in both the House and Senate to extend the provision.

This provision allows IRA owners age 70½ or older to take a tax-free distribution from their Traditional or Roth IRA if paid directly to a qualified charity, subject to a $100,000 annual limit. The provision also contains special transition rules to enable IRA owners to have charitable donations made before February 1, 2013, treated as 2012 QCDs.

Under the special transition rules, IRA owners may make QCDs (paid directly from the IRA to the charity) through January 31, 2013, and treat the distributions as QCDs for 2012. This special rule applies only for distributions treated as QCDs for 2012. QCDs for 2013 must be made by December 31, 2013.

IRA distributions paid directly to IRA owners in December 2012 (rather than paid directly from the IRA to the charity) also may be treated as 2012 QCDs if paid (indirectly) by the IRA owner to the charity by January 31, 2013.

In-Plan Roth Rollovers Expanded

ATRA liberalizes the conditions for executing in-plan Roth rollovers (IRR) within 401(k), 403(b), and governmental 457(b) plans offering Roth elective deferrals. Such “conversions” of pretax plan assets to designated Roth status are taxable in the year they occur. IRRs previously were available to plan participants only when they had satisfied a statutory or regulatory distribution trigger permitted by the plan. ATRA changes this and permits an IRR without the requirement that a participant have a statutory or regulatory distribution trigger.

Passage of the fiscal cliff bill was one of the last acts of the lame duck Congress. The new Congress very shortly will face a raft of contentious issues as well. Stay tuned.

Dennis Zuehlke

Dennis Zuehlke

Dennis is Compliance Manager for Ascensus. Mr. Zuehlke provides clients with technical support on tax-advantaged accounts (including individual retirement accounts, health savings accounts, simplified employee pension plans, and Coverdell education ... Web: Details