What We Know So Far About the "Fiscal Cliff" Deal: Part 1 of 3 on the Fiscal Cliff
- Income Tax Rates: Income tax rates will increase for single workers earning more than $400,000 and families earning more than $450,000. Income tax rates in this bill will be considered "permanent," as opposed to the Bush tax cuts of 2001, which were considered temporary.
- Payroll Taxes: Payroll taxes will increase for workers at all incomes, with the Social Security tax returning to 6.2% on a worker's first $113,700 in wages. This tax was temporarily set at 4.2% two years ago. For a worker earning the national average of $41,000, this increase comes to about $32 more per biweekly paycheck. (Here is our Facebook post describing payroll taxes.)
- Tax Credits: There will be a five year extension of the tax credits expanded under the 2009 ARRA legislation, including the Earned Income Tax Credit and the Child Tax Credit. A "more generous tax credit" was also given at that time for college tuition. According to the Center for Tax Justice, this extension will help 13 million families avoid an average $834 tax increase.
- Extended Unemployment Benefits: This bill continues unemployment benefits extensions for the long-term unemployed through 2013.
- Income Tax Deductions: For individuals earning $250,000 or more (and families earning $300,000 or more), personal exemptions will be phased out and itemized deductions will be limited.
- AMT: The Alternative Minimum Tax (AMT) has been a worry for many middle income taxpayers. When it was added to the tax code in 1982 to ensure that wealthier Americans didn't "use tax loopholes to avoid paying taxes," the AMT was not indexed to inflation. Temporary measures have been put into place to prevent the AMT from affecting middle income Americans, but this deal contains a permanent fix.
- Estate Taxes: The estate rate tax will rise from 35% to 40%; before the deal was reached, estate taxes would have risen to 55%. The first $5 million of an individual's estate will be exempt from this tax ($10 million for family estates) and the exemption levels will be indexed to inflation.
- Capital Gains Taxes: Capital gains and dividends taxes will rise from 15% to 20% for individuals earning $400,000 or more and families earning $450,000 or more. Speaker Boehner and President Obama agreed to this portion of the deal earlier in the cliff debate.
- Business Tax Breaks: Routine tax breaks that are traditionally extended were included as part of the deal, including research and development tax credits and clean energy tax credits.
What does all this mean for the average American? The New York Times reports that those in the bottom 20% of earnings ($11,290/year) will see a 1.1% decrease in after-tax income (paying $219/year instead of $99), while workers in the middle 20% will see a 1.5% decrease in after-tax income (paying $8,136 instead of $7,457). Those in the top 0.1% of earnings (with nearly $8 million or more in income) will see a decrease of 8.4% in after-tax income.
So what didn't get covered in the cliff deal? Check out our next post to find out. You may also want to read this article on the Winners and Losers of the deal.