Congress on New Year's Day approved legislation to address the year-end tax hikes and spending cuts known as the fiscal cliff. The measure passed the House late on Tuesday after the Senate approved it earlier in the day. Here’s what’s in it:
- Higher taxes on individuals earning $400,000 and on families making $450,000 or more. Under that threshold, the Bush-era tax cuts will be permanent for all but the wealthiest households. The $450,000 threshold for families is a significant increase from Democrats’ initial proposal to raise taxes on Americans making $250,000 or more, but it is lower than Republicans’ earlier proposal to raise taxes on households making $1 million or more.
- Higher tax rates on capital gains and dividends for wealthier households. Taxes on capital gains and dividends will be held at their current levels of 15 percent for individuals making less than $400,000 and households with income of less than $450,000. They will rise to 20 percent for individual taxpayers and for households above those thresholds.
- Automatic spending cuts delayed for two months. The "sequester," which would impose steep, across-the-board cuts to domestic and defense programs, will be delayed for two months.
- One-year extension to unemployment insurance. Emergency unemployment benefits will be extended for a year. The extension was a priority for President Obama and congressional Democrats.
- One-year "doc fix." The measure will put off scheduled cuts in physician payments under Medicare. In the absence of an agreement, the payments were going to be reduced by 27 percent in January.
- Nine-month farm bill extension. Breakfast lovers, rejoice: A much-feared spike in milk prices, dubbed the “dairy cliff” because it was also set to kick in abruptly on Jan. 1, will be averted through a nine-month extension of certain portions of the farm bill.
- Personal exemptions phased out for individuals making over $250,000. 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.
- 40 percent estate tax. The estate tax will rise to 40 percent from its current 35 percent level, with the first $5 million in assets exempted. Democrats had earlier sought a higher increase to 45 percent and a lower exemption of $3.5 million.
- Permanent fix to the Alternative Minimum Tax. The alternative minimum tax was levied to ensure the wealthiest Americans paid a fair share of taxes. It was not indexed for inflation but is usually “patched” annually to prevent an increasingly large swath of middle-class Americans from being caught in its net. As part of the fiscal deal, the AMT will be permanently indexed to inflation.
- Tax breaks for working families. The deal includes five-year extensions 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.
- Business tax breaks. The Senate Finance Committee passed a package in August that tackled a variety of routinely expiring tax provisions known as extenders. These popular tax provisions include breaks for research and development. That package passed as part of the broader cliff deal.
- Congressional pay freeze. President Obama recently authorized a congressional pay raise in a move that angered many congressional Republicans. Under the New Year's cliff measure, members of Congress won't see their pay increase.
Although the legislation will avert many of the year-end tax hikes and spending cuts that were set to kick in, it failed to address some of the major issues that have divided Congress in recent months. Here’s what it left out:
- An agreement to raise the debt ceiling. The nation reached its borrowing limit on Monday, and the Treasury Department has said it will use “extraordinary measures” to avert default as long as it can—likely into February. Then Congress will have to once again take up the contentious issue of raising the country’s so-called debt ceiling. Last time, the negotiations resulted in a downgrade of the U.S. credit rating and a whipsaw month in markets. This time, the stakes will be just as high.
- Extension of the payroll-tax cut. A temporary, 2-percentage-point cut to the payroll tax expired at midnight on Dec. 31, 2012, and was not renewed. If you make $50,000, that’s an extra $1,000 in taxes you will be paying this year.
- A grand bargain. Lawmakers didn’t address the country’s long-term fiscal issues in this bill -- namely, a complicated tax code and rising entitlement spending.