Although major battles over spending cuts and raising the federal debt limit have been punted for another two months, the fiscal-cliff bill passed by Congress settles most of the significant tax issues that would have an immediate and direct impact on the average taxpayer's pocketbook, a University of Illinois expert on taxation and retirement issues says.
The resolution of the fiscal cliff crisis postponed the day of reckoning for most of the sequestration-imposed spending cuts, but it did determine what the tax system will look like for individuals and businesses this year, says law professor Richard L. Kaplan.
"Perennial issues like the alternative minimum tax now have a permanent solution, while many extremely important tax parameters like the rate structure and the treatment of capital gains have been settled," said Kaplan, the Peer and Sarah Pedersen Professor of Law. "Congress can certainly revisit these tax questions in the future, but there is no longer any uncertainty or pending deadlines regarding the U.S. tax system for 2013."
Tax simplification, however, took a major step backward, says Kaplan, an internationally recognized expert on U.S. taxation and tax policy.
"Not a single deduction or credit was eliminated," he said. "Indeed, many new ones were added for specific industries and activities, like purchasing electric vehicles and extending a tax benefit related to Puerto Rican rum. Capital gains still receive preferential treatment, and the number of tax brackets has actually increased."
The new law does, however, provide both increased certainty and lower tax rates than if legislators had done nothing and simply let the Bush-era tax cuts expire. As a result, the government's budget deficit will likely be larger than previously projected, Kaplan says.
"In addition, a variety of phase-out provisions that both complicate the code and raise effective tax rates were reactivated," Kaplan said. "To be sure, almost all of these convoluted new rules apply only to persons with income of at least $250,000 per year.
"Yet, despite all of the campaign talk about taxes paid by very wealthy individuals, this new legislation does not really address that issue. The Warren Buffetts and the Mitt Romneys of the world will see their effective tax rates rise, but their rates will still be well below the rates applicable to less wealthy people because the capital gains tax benefit is largely preserved."
Explore further: The unexpected benefits of adjustable rate mortgages