The legislation raises tax rates for individuals earning $400,000 or more. The threshold is $450,00 for households. Tax rates will not increase for more than 98 percent of Americans and small businesses, President Obama said in a press conference following the House vote. The president said he will sign the bill into law.
Entitled the American Taxpayer Relief Act of 2012, the legislation will add nearly $4 trillion to federal deficits over the next ten years, versus a debt-reduction plan that is suppose to be a major component of the “fiscal cliff” scenario, according to the non-partisan Congressional Budget Office.
That’s primarily because the plan extends low income tax rates for nearly every American, except the small percentage above the $400,000 threshold.
The deal approved by Congress today puts off for at least two months the automatic budget cuts, the so-called sequester, that are part of the cliff, and would have saved about $109 billion in federal spending on defense and non-defense programs alike.
The House vote tonight came several hours after the Senate approved its plan 89-9 in the wee hours of the new year, as they tried to beat the clock on the “cliff” that would have raised tax rates on millions of middle-income Americans.
The deal reached by the Senate and approved by both chambers meets President Obama’s campaign promise of raising taxes on wealthier Americans and averting the worst effects of the cliff. However, Obama had hoped for a $250,000 threshold for raising tax rates.
Nonetheless, most middle-income and lower-income workers will see less in their paychecks starting this month. The fiscal-cliff deal does not include an extension of the so-called payroll tax holiday, which was enacted two years ago as a temporary economic stimulus. Paychecks for more than 160 million Americans will be 2 percent smaller, as the payroll tax will jump back to 6.2 percent from 4.2 percent. Obama had initially proposed extending the payroll tax holiday, but later dropped that demand weeks ago as talks deadlocked.
The heart of the fiscal cliff deal: current tax rates will be extended for all wage earners making below $400,000 and couples making below $450,000.
Households earning less than $450,000 would likely not see higher income-tax bills. However, couples earning more than $300,000 a year and individuals earning more than $250,000 would lose part of the value of their exemptions and itemized deductions.
Here are key highlights of the fiscal-cliff deal:
- Permanently extends tax cuts made in 2001 by President George W. Bush for income below $400,000 per individual, or $450,000 per family. Income above that level would be taxed at 39.6 percent, up from the current top rate of 35 percent.
- The estate tax was set to jump from 35 percent to 55 percent in 2013. Instead, the new rate is at 40 percent, with the first $5 million worth of property exempt from being taxed.
- Capital gains and dividend tax rates will increase from 15 to 20 percent.
- Extends deductions for mortgage insurance premiums and for state and local property taxes.
- Extends child tax credit, earned income tax credit, and tuition tax credit for five years.
- Extends unemployment insurance benefits for one year for 2 million people.
- Alternative Minimum Tax: a permanent fix is part of the agreement to avoid higher taxes for middle class families; a “patch” was needed to the AMT for inflation. Nearly 30 million households would be protected from paying the costly alternative minimum tax for the first time — either on their 2012 tax returns or future returns.
- Doctors will be shielded from a massive reimbursement gap for treating Medicare patients, referred to as the “doc fix.”
- Renewable energy tax credit for clean-energy companies will be extended for another year.
- Extends research and experimentation tax credit, and the wind production tax credit through the end of 2013. Extends 50 percent bonus depreciation for one year
Overall, the “fiscal cliff” plan would raise roughly $600 billion in new revenue over the next decade from the wealthiest 2 percent of households — less than Obama had been seeking, and less than House Speaker John A. Boehner, R-Ohio, had proposed in an earlier proposal.