Last night, the House approved the Senate bill to avert the fiscal cliff. Here's the major elements, and what it means to you:
- The Bush tax cuts have been extended on incomes lower than the threshold of $400,000 ($450,000 for married couples). This will keep close to $229 billion in consumers' hands. The good news is that this is a permanent tax cut. Incomes above that amount revert to the Clinton-era rates (top rate at 39.6%).
- Extended unemployment benefits will continue for another year.
- The 2% payroll tax holiday has been rescinded. You've had this since the 2010 Obama tax cuts.
- Capital gains and dividends: Taxes have been permanently raised from 15% to 20% for those with incomes above the threshold.
- Estate taxes: Taxes rise from 35% to 40% of estates above $5 million for those above the income threshold, which will be indexed to inflation.
- Alternative Minimum Tax: Permanently indexed to inflation, so it doesn't have to be patched each year.
- Sequester: Delayed for two months.
The bill also prevents a 37% decline in Medicare payments to doctors, extend federal dairy subsidies through September, and cancel a scheduled pay raise for Congress.
Many Tea Party Republicans reluctantly approved the bill, despite their pledge to Grover Norquist to never raise taxes. They could honestly say they supported that pledge because the Bush tax cuts technically expired on December 31, 2012. They can safely tell their constituents that they approved a tax cut for Americans making less than $400,00.
The spending cuts that Republicans wanted will now be negotiated when the sequestration waiver expires in two months. They can further negotiate spending cuts as part of FY 2014 budget process, which starts on February 1.
President Obama said he will not negotiate them as part of the debt ceiling debate, which will start immediately since the public debt is officially at the $16.4 trillion limit. He made a good point when he said, "While I will negotiate over many things," he said, "I will not have another debate with this Congress over whether they will pay the bills they've already racked up." Congress should use the budget process to enforce spending cuts, and not hold the economy hostage with the debt ceiling.
There are a few other tax breaks and deductions that have been included. For those, see Suzy Khimm's excellent summary in the Washington Post WonkBlog, Your Fiscal Cliff Deal Cheat Sheet.
What It Means to You
- You will see a 2% increase in your payroll tax withholding, effective immediately.
- If you are unemployed, you will keep your benefits.
- You will see higher tax rates on income above $400,000 for singles, $450,000 for families. The withholding probably won't hit for a few weeks, as it takes time for payroll managers to put the changes into place.
Regardless of what happens on the fiscal cliff vote, Obamacare taxes will be applied to incomes above $200,000 ($250,000 for married couples). For specifics, see Did You Know Your Taxes Are Going Up Anyway?