The White House and Mitch McConnell reached a tentative deal early New Year’s Day and it passed in the Senate by a vote of 89-8 during an early morning vote, averting the so-called ‘fiscal cliff’ in regards to the American economy. They then went home. Later, after hours of behind-the-scene debate and threatening to add amendments, the House of Representatives finally relented, passing the Senate Bill by a vote of 257-187.
The measure will raise taxes by about $600 billion over 10 years and delay for two months across-the-board spending cuts otherwise set to begin slashing the budgets of the Pentagon and numerous domestic agencies.
• Income tax rates: Extends tax cuts on incomes up to $400,000 for individuals, $450,000 for couples. Earnings above those amounts would be taxed at a rate of 39.6%, up from the current 35%. Extends Clinton-era caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.
• Estate tax: Estates would be taxed at a top rate of 40%, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012, such estates were subject to a top rate of 35%.
• Capital gains, dividends: Taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families would increase from 15% to 20%.
• Alternative minimum tax: Permanently addresses the alternative minimum tax and indexes it for inflation to prevent nearly 30 million middle- and upper-middle income taxpayers from being hit with higher tax bills averaging almost $3,000.
• Other tax changes: Extends for five years Obama-sought expansions of the child tax credit, earned income tax credit, and an up to $2,500 tax credit for college tuition.
• Unemployment benefits: Extends jobless benefits for the long-term unemployed for one year.
• Cuts in Medicare reimbursements to doctors: Blocks a 27% cut in Medicare payments to doctors for one year. The cut is the product of an obsolete 1997 budget formula.
• Social Security payroll tax cut: Allows a 2-percentage point cut in the payroll tax first enacted two years ago to lapse, which restores the payroll tax to 6.2%.
• Across-the-board cuts: Delays for two months $109 billion worth of across-the-board spending cuts set to start striking the Pentagon and domestic agencies this week. Cost of $24 billion is divided between spending cuts and new revenues from rules changes on converting traditional individual retirement accounts into Roth IRAs.
The debate will continue soon on spending cuts. Some interpret last week’s action as for every $1 saved, it created approx. $41 dollars in new taxes. Will they pay down the debt or find other ways to spend it this revenue? Stay tune.
By Bob Simmons