President Obama signed into law on Wednesday the American Taxpayer Relief Act of 2012, a last minute compromise by federal lawmakers that pulled the nation away from the “fiscal cliff.” The law makes permanent numerous federal tax provisions scheduled to expire on December 31, 2012. Notably important for tax payers is the extension of ordinary income tax rates for individuals who earn less than $400,000 per year (less than $450,000 per year for joint filers). The law also addressed a number of other employee fringe benefit provisions we discuss below in more detail.
- Education Assistance Benefits. Employers may continue to reimburse employees up to $5,250 annually for undergraduate and graduate education expenses on a pre-tax basis. This particular provision—which until now tended to expire and then be resurrected—was made permanent.
- Mass Transit & Vanpool Expense Benefits. With a January 1, 2012, retroactive effective date, the maximum pre-tax contribution for mass transit and vanpool expense benefits increased to $240 per month (up from $125 per month in 2012), but these tax benefits are set to expire after December 31, 2013. For administration purposes, most employers will implement these limits in 2013, rather than retroactively. The employer-provided parking expense maximum remains $240 per month.
- Adoption Tax Credit and Adoption Assistance Programs. For taxable years beginning after December 31, 2012, taxpayers can receive a tax credit for qualified adoption expenses and also exclude from income certain adoption expenses paid by an employer. Both the credit and the income exclusion for employer adoption assistance programs are permanently extended to $10,000 per year.
- Consumer Oriented and Operated Plans (CO-OPs). The Patient Protection and Affordable Care Act (PPACA) prescribed funding for non-profit, cooperative insurance plans (“Co-op plans”)—plans that were to be offered as an alternative to state insurance exchanges, beginning in 2014. Due to insufficient funds, the law passed on Wednesday eliminated any requirement to establish co-op plans, the nearest thing to the controversial “public option” that Congressional Democrats were unable to include in the PPACA.
- The Community Living Assistance Services and Support Program (the CLASS Act). Early last fall, the Obama administration decided not to implement the CLASS Act, because of it’s shaky financial underpinnings. The fiscal cliff deal formally stuck a fork in the program, repealing it outright.
While the law avoids several other automatic tax increases and establishes some reductions in spending, it only temporarily delays the vast majority of federal spending cuts set to effect Medicare and the defense budget. We’ll monitor these developments as the new Congress moves forward.