"Fiscal Cliff" Deal Preserves Bush Tax Cuts For Most Americans

Wealthier Americans Will Pay More

The budget agreement that averted the "fiscal cliff" preserves tax cuts for most Americans, but other taxes will go up this year.  The temporary reduction in employees' contributions to Social Security will end up costing the average household an extra $1,000.   The income tax rate of individuals making more than $400,000 a year and of couples whose combined income is greater than $450,000 will rise from 35% to 39.6%  and taxes on capital gains and dividends will rise to 20%.  Personal exemptions will be phased out and itemized deductions will be limited for taxpayers making over $250,000 and families earning more than $300,000.  The alternative minimum tax which was first levied in 1969 to ensure the wealthiest Americans paid a fair share of taxes was never indexed for inflation.  Congress usually "patched" the AMT annually to prevent an increasingly larger cross section of middle class Americans from being caught in the net.  As part of the fiscal deal, the AMT will be permanently indexed to inflation.

Tax Breaks For Low Income Working Families Preserved

The deal preserved the 10% tax bracket for taxpayers making less than $8,925 annually and households making less than $17,850 annually.  The deal includes a five-year extension  of the American Opportunity Tax Credit, which can be claimed for college-related expenses; the Child Tax Credit; and the Earned Income Tax Credit, which is a refundable income-tax credit for low to moderate income working Americans.   Emergency unemployment benefits will be extended for one year. 

Federal $5,000,000 Estate, Gift, and GST Transfer Taxes Made Permanent

Although the federal estate, gift, and generation skipping transfer taxes will continue to have $5,000,000 exemptions indexed for inflation, the estate transfer tax will rise to 40%.

Automatic Spending Cuts Delayed For Two Months

The "sequester" which could impose steep across-the- board spending cuts to domestic and defense programs, will be delayed for two months as Washington continues to debate fiscal policy, as well as an increase in the U.S. debt ceiling in the coming weeks.  Although the legislation averts many of the year end tax hikes and spending cuts that were set to kick in automatically, Lawmakers failed to address the country's long-term fiscal issues in this bill--namely, a complicated tax code and rising entitlement spending.  Congress will once again have to take up the contentious issue of raising the country's debt ceiling.  Last time, the negotiations resulted in a downgrade of the U.S. credit rating.  This time, the stakes will be just as high.