NAHB Announces Effects of the Fiscal Cliff Settlement
The fiscal cliff has been avoided, thanks due to the enactment of H.R. 8, which extends permanently most, but not all, of the 2001/2003 tax cuts. The legislation prevents a fiscal drag of $600 billion in 2013, which was large enough to push the continuing weak economy into recession. The following presents items in the bill that are of interest to housing and home builders.
Business Tax Items
• Permanently extends the 2001/2003 tax rates for income levels under $450,000 ($400,000 single)
o 80 percent of NAHB members are pass-thru entities that pay business tax on individual tax forms.• Permanently extends the Alternative Minimum patch
o The legislation protects the vast majority of membership from business tax hikes.
o This includes the income tax rates and the 15 percent rates for capital gains and dividends.
o In a typical tax year, about 5 million taxpayers pay AMT. Absent the "patch," or increased exemption amount, another 25 million taxpayers would face higher taxes via the AMT, many of them small businesses.• Permanently sets the parameters of the estate tax
o A permanent patch for the AMT prevents many NAHB members from facing higher tax liability and protects housing deductions and credits like the real estate tax deduction and the 25C energy efficient tax credit from being reduced in value.
o The legislation extends the $5 million (indexed to inflation) exemption amount set in 2010, but raises the rate of tax to 40 percent for estate value above the exemption amount.• Extends section 179 small business expensing through the end of 2013
o A higher exemption amount protects large numbers of small businesses.
o The provision increases the maximum amount of depreciation and the income phase-out threshold in 2012 and 2013 to the levels in effect in 2010 and 2011 ($500,000 and $2 million respectively).• Extends the section 45L new energy efficient home tax credit through the end of 2013
o Provision allows a $2,000 tax credit for energy efficient for-sale and for-rent housing in buildings with fewer than three stories above grade.Homeowner Tax Items
• Extends through the end of 2013 mortgage debt tax relief
o The legislation extends the tax exclusion for cancelled or forgiven principal residence debt, enabling short sales and reducing downward pressure on housing prices.• Deduction for mortgage insurance extended through the end of 2012
o Also enables mitigation efforts via government and lenders.
o The deduction remains phased-out ratably by 10 percent for each $1,000 by which the taxpayer’s AGI exceeds $100,000, with complete phase-out at $110,000.• Extends the section 25C energy-efficient tax credit for existing homes through end of 2013
o Extending the deduction reduces the cost of homeownership for those using PMI, FHA, or VA mortgage insurance, particularly first-time buyers.
o Tax credit is a key tool for the remodeling community.• Reinstates the Pease/PEP phase-outs for deductions
o Extends the credit at the $500 cap level, as was the case in 2011.
o For married taxpayers above $300,000 ($250,000 single), the Pease limitation reduces total itemized deductions by 3 percent for the dollar amount of AGI above the thresholds.• Extends the 9 percent LIHTC credit rate for allocations through the end of 2013
o For example, a married couple at $350,000 is $50,000 above the limit, and must reduce the Schedule A deduction total by $50,000 times 3 percent or $1,500, increasing their tax by approximately $300.
o No more than 20 percent of the phase-out is attributable to the MID and the Pease rule will affect a very small number of current MID beneficiaries.
Multifamily Tax Items
o Absent the credit fix, the LIHTC program would suffer a loss of equity investment for affordable housing projects.• Extension through the end of 2013 of base housing allowance amounts for affordable housing
o The military’s basic housing allowance is not considered income for purposes of calculating whether the individual qualifies as a low-income tenant.Of Note
It is also important to note what did not make the fiscal cliff package, but which may be under consideration for future tax fights in 2013. These items would have a direct effect on the MID and housing demand and include: the 28 percent deduction cap or a hard dollar cap ($50,000, $35,000 or $20,000) for total itemized deductions. The package also did not change the treatment of carried interest. Finally, the legislation did not provide a fast track or trigger for future tax reform efforts or raise the debt limit, and it only postponed the budget sequester for two months.
As you know, NAHB has been preparing for the tax reform fight for the past two years. Even with this legislation and the avoidance of the fiscal cliff, we fully expect, and are prepared for, a full-scale effort to reform the tax code. You can bet that the items not included in this legislation, as noted above, will surely be part of the next chapter in this fiscal drama. After all, the debt ceiling limit and sequester are due to hit at the end of February.