The House passed a deal to avert an income tax rate increase on middle-class families on Tuesday night, following a New Year’s Eve vote by the Senate, sending the bill to President Obama for his signature.

House lawmakers voted for the bill by a 257 to 67 margin, after the Senate’s 89 to 8 vote, in a rare New Year’s Day session of a lame-duck Congress (see Senate Approves Post-Midnight Fiscal Cliff Deal, Shifting Pressure to Boehner). Vice President Joe Biden and Senate Minority Leader Mitch McConnell, R-Ken., worked out the final deal this week following a stalemate in negotiations between Obama and Speaker of the House John Boehner, R-Ohio.
Republican lawmakers had threatened to amend the bill with deep spending cuts to offset the tax cuts and send it back to the Senate, but with time running out before the re-opening of the financial markets on Wednesday morning, Boehner ultimately decided to allow an up or down vote on the bill.
The deal restores the top 39.6 percent rate for high-income households in effect during the 1990s. That rate would apply to single taxpayers with incomes above $400,000 and married couples with incomes above $450,000, up from 35 percent.
“Under this law, more than 98 percent of Americans and 97 percent of small businesses will not see their income taxes go up,” said Obama in a speech following the vote. He pointed out that the agreement reduces the deficit by raising $620 billion in revenue from the wealthiest households.
"A central promise of my campaign for President was to change the Tax Code that was too skewed towards the wealthy at the expense of working middle-class Americans," he said. "Tonight we've done that. Thanks to the votes of Democrats and Republicans in Congress, I will sign a law that raises taxes on the wealthiest 2 percent of Americans while preventing a middle-class tax hike that could have sent the economy back into recession and obviously had a severe impact on families all across America."
In addition, the agreement provides a permanent and retroactive patch for the alternative minimum tax to prevent it from ensnaring middle-class taxpayers. The bill indexes the exemption amounts to adjust them for inflation.
The capital gains tax rate would return to what it was under President Clinton, 20 percent, up from 15 percent. Counting the 3.8 percent surcharge from the Affordable Care Act, dividends and capital gains would be taxed at a rate of 23.8 percent for high-income households. These tax rates would apply to singles above $400,000 and couples above $450,000. The top capital gains rate would stay at 15 percent for lower-income taxpayers.
The agreement reinstates the Clinton-era limits on high-income tax benefits, the phaseout of itemized deductions (Pease) and the Personal Exemption Phaseout (PEP), for couples with incomes over $300,000 and singles with incomes over $250,000. These two provisions reduce tax benefits for high-income households. This sets the stage for future balanced approaches to deficit reduction, which could include additional revenue through tax reforms that reduce tax benefits for Americans making over $250,000.
The deal did not include an extension of the 2011 and 2012 payroll tax cut on Social Security tax withholding from paychecks, so most workers will see their Social Security taxes rise from 4.2 to 6.2 percent (see IRS Changes Income Tax Withholding Tables for 2013 to Reflect Expired Tax Cuts).
The agreement also raises the tax rate on the wealthiest estates from 35 percent to 40 percent, with an exemption of $5 million per person.
There is also a one-year extension of 50 percent bonus depreciation, and the extension of various tax breaks. The deal extends President Obama’s expansions of the Child Tax Credit, Earned Income Tax Credit, and the American Opportunity Tax Credit, which helps families pay for college. The agreement would extend the tax breaks for five years.
In addition, the agreement will prevent 2 million people from losing unemployment insurance benefits in January by extending emergency unemployment insurance benefits for one year.
The bill also extends renewable energy incentives and other business tax incentives through the end of next year. They include extensions of the Production Tax Credit, a key incentive for renewable energy, as well as the Research & Experimentation tax credit.
The agreement also avoids a 27 percent cut to reimbursements for doctors seeing Medicare patients for 2013 by fixing the sustainable growth rate formula through the end of next year (the “doc fix”). It also renews a price support program for the dairy industry to prevent a sharp increase in milk prices, as well as blocks a pay increase for Congress.
In addition, the bill postpones the sequester for two months, paid for with $1 of revenue for every $1 of spending, with the spending balanced between defense and domestic. The agreement saves $24 billion, half in revenue and half from spending cuts which are divided equally between defense and nondefense programs, in order to delay the sequester to give Congress time to work on a balanced plan to end the sequester permanently through a combination of additional revenue and spending cuts in a balanced manner.
Obama promised further deficit reductions would be worked out with Congress, but he indicated that he would not allow a fight over raising the debt ceiling to derail the economy, insisting he would not “have another debate with this Congress over whether or not they should pay the bills they’ve already racked up.”
However, Republicans indicated that they would push for further spending cuts. “Now the focus turns to spending,” said Boehner. “The American people re-elected a Republican majority in the House, and we will use it in 2013 to hold the president accountable for the ‘balanced’ approach he promised, meaning significant spending cuts and reforms to the entitlement programs that are driving our country deeper and deeper into debt.”












10 Comments
My fix would be: eliminate the earned income credit. Those of us over forty did not have a refund when we were just starting out and poor. We had to pay our taxes. NO REFUNDS for earning up to $40,000. Instead of the earned income credit, change the tax code to eliminate the standard deduction and personal exemption as they now stand. Make the standard deduction the same amount as the poverty level which is between $10,000 and $15,000 per person in the household. No itemized deductions.
If the poverty level is $12,000, then the standard deduction for a family of four would be $48,000. Any income above that amount would be taxed. We would also save money on fraudulent earned income credits. And we would eliminate the cost of sending out all of those checks.
Posted by: Granny | January 3, 2013 11:45 AM
Report this Comment
Lost in all the complaints about the national debt is the money that Bush and Cheney spent to start wars for the benefit of Haliburton and other useless contractors without increasing taxes on the privileged caste (Bush's 1.3 trillion tax cut when he was first elected) and not levying a war profits tax on these beneficiaries of a rip-off of normal taxpayers. Too bad Republicans won't add up these mistakes as a portion of the debt, including interest paid to the same wealthy. Their hypocrisy is so nauseating when they cry about entitlements (naturaly their entitlements of tax breaks that let them shift wealth to tax havens is lost in their brains)
Posted by: Janosik | January 2, 2013 11:28 AM
Report this Comment
I disagree with those who say that spending is the problem. It is only 1/2 of the problem. The US has not had a balanced budget in recent history with revenues under 19% of GDP. See the graph in the Wall Street Journal from February 14, 2012.
Posted by: LaLafayette | January 2, 2013 9:54 AM
Report this Comment
Household income of $400K is not, by any definition, "middle class!" The median household income in the US is some $50-60K.
There are well-established standards in economics that promote healthy growth in a developed economy like ours. Unfortunately, too many politicians have abandoned those in favor of ideology and misinformation.
Posted by: JAscher | January 2, 2013 9:01 AM
Report this Comment
No, the IRS was planning on an AMT patch. There would have been a delay in filing without the patch.
Posted by: stevecpa66 | January 2, 2013 8:42 AM
Report this Comment
Social Security taxes increased for all. Boom. It is not refundable.
Posted by: nadezdamindyuk | January 2, 2013 8:39 AM
Report this Comment
AMT patch becomes permanent....requiring IRS to reprogram 2012. A 60 day delay to 1040 tax filings??
Posted by: aguidr@aol.com | January 2, 2013 8:05 AM
Report this Comment
This amounts to a 5% reduction re the annual 1.2 trillion borrowing .....
Posted by: aguidr@aol.com | January 2, 2013 8:01 AM
Report this Comment
At least something got done. Although I do feel like I was pushed over the cliff, and after a long and dizzying fall, there is a big mattress to disguise the trauma of the fall.
When the world sobers up, and realizes that this is not the complete package that is needed to get the U.S. on more solid ground, things could get rocky. This could start with a re-examination of the USA credit rating. The last one didn't hurt too much... but what would the impact of another reduction mean?
The can has officialy been kicked again with respect to spending. I don't think any rational person is trying to weasel out of paying our past bills, but I do believe that most rational people do understand that our spending must be cut in order to restore solvency to our sovereign nation.
The next 60 days will be interesting in DC.
Posted by: jnap | January 2, 2013 7:56 AM
Report this Comment
The politicians in DC should be ashamed and embarrassed to run this debate over the cliff only to patch it for 2 months. Spending is the key issue and this adds to the deficit when viewed in total. When one looks closer, taxes are going up on most all who pay them, while doing next to nothing to solve our economic crisis. It is a failure of leadership from the White House.
Posted by: RondoCPA | January 2, 2013 7:55 AM
Report this Comment
Add Your Comments...
Already Registered?
If you have already registered to Accounting Today, please use the form below to login. When completed you will immeditely be directed to post a comment.
Not Registered?
You must be registered to post a comment.