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Inside the Fiscal Cliff Deal

Written by Nickel - 8 Comments

Inside the Fiscal Cliff Deal

Well, Congress finally got around to addressing the fiscal cliff, with the Senate passing legislation shortly after midnight and the House expected to vote today or tomorrow.

Thus, while technically went over the cliff, it should be fixed before it really matters. So what did they agree on?

Here’s a quick rundown:

  • Instead of letting the Bush era tax cuts expire in their entirety, the current structure of the federal income tax brackets will be preserved for everyone earning less than $400k (single filers) or $450k (for couples filing jointly). For those over that threshold, there will be a new 39.6% tax bracket.
  • Estates will now be taxed at a top rate of 40%, with the first $5M (individuals) or $10M (couples) being exempted from the calculation. In 2012, the rate was 35%.
  • Long term capital gains and qualified dividends will now be taxed at 20% (vs. 15%) for those above the $400k/$450k threshold. Note that this rate doesn’t apply to all of their capital gains and dividends. Rather, it’s for amounts that take their income above the threshold.
  • The AMT has been (finally!) fixed by indexing it to inflation. Thus, it won’t have to be patched annually.
  • The expansions of the child tax credit, earned income credit, and college tuition credit have been extended for five years.
  • The accelerated “bonus” depreciation of business investments in property and equipment has been extended for a year, as have credits for R&D costs and investment in renewable energy.
  • Long-term unemployment benefits have been extended for 2013.
  • A 27% reduction in Medicare payments to doctors has been blocked for one year.
  • The temporary “payroll tax holiday” has been allowed to expire.
  • Finally, the $109B in “sequestration” cuts has been delayed for two months. In other words, we get to do this all over again — not to mention the upcoming debt ceiling debate.

That’s all for now. Happy New Year.

Published on January 1st, 2013
Modified on January 12th, 2013 - 8 Comments
Filed under: Taxes

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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8 Responses to “Inside the Fiscal Cliff Deal”

  1. 1
    Karim Says:

    I saw the negotiations allow for a conversion from a 401k directly to a Roth IRA-even if you are still employed. Does anyone know if there are more details on this?

    http://www.investmentnews.com/...../130109998

  2. 2
    Nickel Says:

    Karim: I read something about that but there weren’t sufficient details in what I had read to include here — your link explains it better. Itt was included to generate revenue to help cover some of the spending measures. In general terms, if you move money to a Roth you owe taxes — though this creates a crunch down the road when that money will come out of the Roth tax free. They’re essentially robbing tomorrow to pay for today.

  3. 3
    Penny Says:

    So they didn’t touch donations or mortgage interest deductions? I am rather surprised.

  4. 4
    Brett @ wstreetstocks Says:

    Good to see that Congress resolved the cliff. Stocks are already up alot today. Looks like we are seeing a late Santa Claus rally!

  5. 5
    jim Says:

    Nickel, Good concise summary. Thanks.

    Penny, I don’t think there was much serious talk of hitting the deductions for donations or mortgages. Never got a lot of support from either party. THey did cap deductions for higher earners which will have indirect impact on donations & mortgage deductions for high earners, but thats not targeted at either.

  6. 6
    Tom Says:

    Brett: most stock market watchers are saying this is a temporary uptick based on traders feeling relieved. It won’t last because there are systemic issues left untouched, specifically the need to go all the way to the wire on every fiscal deal now. A debt ceiling crisis is only weeks away and there will be more confrontation and last minute panic.

  7. 7
    Evelyn Says:

    My paycheck went down $90 due to the 2% increase in Social Security tax. Ouch. I get paid every 2 weeeks. I have not had a pay raise in 2 years. This really hurts.

  8. 8
    BG Says:

    Evelyn, the payroll tax holiday was only supposed to last a year, but it got extended for 2012 so enjoyed the lower rates for 2 years.

    The Bush income tax breaks were supposed to have been temporary as well — but they continued on for 12 years.

    ALL of those “temporary” tax-breaks were supposed to have expired a few days ago, but part of the “fiscall cliff” deal made permanent the Bush-era tax cuts for those making less than $400-$450k a year. Plus the child-tax credit extensions, etc.

    Put it this way: your taxes in 2013 are going to be higher than what you paid in 2012, but still lower than what they would have been if we had gone over the cliff (the reversion to Clinton-era tax rates).

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