Details of the Fiscal Cliff Tax Deal

 
 
January 01, 2013

At 2AM this morning, the Senate passed H.R. 8, the American Taxpayer Relief Act of 2012, by a vote of 89-8. Voting no were Bennet (D-CO), Carper (D-DE), Grassley (R-IA), Harkin (D-IA), Lee (R-UT), Paul (R-KY), Rubio (R-FL), and Shelby (R-AL). Not voting were DeMint (R-SC), Kirk (R-IL), and Lautenberg (D-NJ). TaxProfBlog has the text of Senate-passed bill  (157 pages). The Joint Committee on Taxation (JCT) has also produced a revenue estimate, as has the Congressional Budget Office (CBO). The House of Representatives is expected to vote on the bill today sometime. (UPDATE: Just after 11pm, the House of Representatives voted 257-167 to adopt the Senate bill without amendment. The President signed the bill into law on January 3.)

Because the tax cuts were scheduled to expire anyway, JCT scores it as a $3.9 trillion tax cut over 10 years; compared to current policy, however, it is a $620 billion tax increase (plus $15 billion in spending cuts according to JCT, or minus $57 billion in spending increases according to CBO). (More details on the fiscal cliff and the 10-year budget estimates here.)

Key elements of the deal:

  • Retains the 10 percent, 15 percent, 25 percent, and 28 percent income tax brackets from the Bush tax cuts permanently
  • Retains the 33 percent and 35 percent income tax brackets from the Bush tax cuts for taxable income under $400,000 (single), $425,000 (head of household), and $450,000 (joint filers). Imposes  39.6 percent tax rate on income above this level.
  • Phases out personal exemptions (PEP) for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers)
  • Limits itemized deductions (Pease) for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers)
  • Capital gains tax and dividends tax will be 20 percent for taxpayers with income over $400,000 (single) and $450,000 (joint filers). This does not include the new 3.8 percent health care tax on investment income above $200,000 (single) and $250,000 (joint filers) in adjusted gross income, so the top rate for capital gains and dividends will be 23.8 percent. For lower income levels, the tax will be 0 percent, 15 percent, or 18.8 percent.
  • Continues setting the standard deduction for joint filers at 2 times single filers (would have otherwise reverted to 1.67 times single filers)
  • Permanently sets Alternative Minimum Tax (AMT) exemption at $50,600 (single) and $78,750 (joint filers) for 2012 and adjusts for inflation thereafter
  • One year extension of 50 percent bonus depreciation rules
  • Extends American Opportunity Tax Credit (education) through 2017
  • Extends the various “extenders” tax incentives through 2013
  • Retains the doubled child tax credit ($1,000) permanently, its refundable portion through 2017, and the expanded earned income tax credit (EITC) through 2017
  • Raises estate and gift tax to 40 percent, but above the current exemption level (~$5.12 million) and adjusted for inflation in future years
  • Extends emergency unemployment compensation (EUC) and extended benefits (EB) unemployment insurance program through January 1, 2014
  • One year “doc fix” for Medicare payment physicians
  • Extends existing agricultural programs for one year (preventing the “dairy cliff”)
  • Postpones sequester by two months; will now occur on March 27, 2013 (same day as the continuing resolution expires)
  • Permits 401(k) plan participants to convert their plan to a Roth plan, under which contributions are taxed going in but withdrawals are tax-free. The result is a short-term revenue boost now and more tax-free savings accounts.
  • Ends 2 percent payroll tax cut; taxpayers should expect greater FICA withholding from their next paycheck.
  • No action on the debt ceiling. The U.S. hit the debt ceiling on New Year's Eve, although Treasury actions to juggle books and defer payments will forestall default until late February. Biden has reportedly pledged to liberal Democrats that the President will not negotiate over the debt ceiling.

Additionally, the House is considering a bill to cancel the scheduled congressional pay increase (from $174,000 to $174,900) and to continue the 2-year non-military federal employee pay freeze for another year. President Obama issued an executive order on December 27 to raise pay by 0.5 percent beginning April 2013.

UPDATE: There's a rumor that the Senate bill has a "benefit recapture" provision, applying the 35% rate to all income for high-income individuals. This is not true. The alleged provision, on page 7 of the Senate bill, exists because the new 39.6% top rate is not in the tables where it ought to be, but in a different section. The provision thus states that the 35% rate applies to all taxable income from the dollar amount where the highest rate bracket begins for each filing category, up to the threshold for the 39.6% rate. It also clarifies that the 39.6% rate applies to taxable income. There is no provision stating that lower amounts of income are subject to the 35% rate. (They presumably have different rate tables because 10-15-25-28-33-35 rate bracket levels inflation-adjust from a different base year than the new 39.6% rate bracket level, which will inflation-adjust from 2013.)

 

Table: 2013 Taxable Income Brackets and Rates Under H.R. 8 as Amended by Senate
Rate Single Filers Married Joint Filers Head of Household Filers
10% >$0 >$0 >$0
15% >$8,925 >$17,850 >$12,750
25% >$36,250 >$72,500 >$48,600
28% >$87,850 >$146,400 >$125,450
33% >$183,250 >$223,050 >$203,150
35% >$398,350 >$398,350 >$398,350
39.6% >$400,000+ >$450,000+ >$425,000+

 

Table: Major U.S. Tax Provisions, 2001-2013

Tax Category

2000

2001

2002

2003

2004-2005

2006-2007

2008-2009

2010-2012

2013*

Income Tax Brackets

--
15%
28%
31%
36%
39.6%

10%
15%
27.5%
30.5%
35.5%
39.1%

10%
15%
27%
30%
35%
38.6%

10%
15%
25%
28%
33%
35%

10%
15%
25%
28%
33%
35%

39.6%**

Capital Gains Tax (max)

20%

16.7%

15%

23.8%***

Dividend Tax (max)

39.6%

39.1%

38.6%

15%

23.8%***

PEP & Pease

Full

Minus 1/3

Minus 2/3

Repealed

Full****

Marriage Penalty

Joint Filer = 1.67 x Single

Joint Filer = 2 x Single

Joint Filer = 2 x Single

Child Tax Credit

$500

$600

$1,000

$1,000

Source: Tax Foundation
*Under fiscal cliff tax deal passed by the Senate on January 1, 2013.

**Applies to taxable income over $400,000 (single), $425,000 (head of household), and $450,000 (joint filers)

***Capital gains tax and dividends tax will be 23.8 percent for taxpayers in the 39.6 percenttax bracket. This includes the 20 percent top tax rate and the new (for 2013) 3.8 percent health care tax on investment income on adjusted gross income over $200,000 (single) and $250,000 (joint filers). For lower income levels, the tax will be 0 percent, 15 percent, or 18.8 percent.

****Applies to tax filers with adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers).

 

Table: Estate Tax Rates & Exemption Levels, 2000-2013

 

Estate tax (top rate)

Estate tax exemption

2000

55%

$675,000

2001

55%

2002

50%

$1,000,000

2003

49%

2004

48%

$1,500,000

2005

47%

2006

46%

$2,000,000

2007

45%

2008

2009

$3,500,000

2010

Repealed

Repealed

2010-2012

35%

$5,120,000

2013*

40%

$5,120,000
(or inflation-adjusted level)

Source: Tax Foundation; Internal Revenue Service.
*Under fiscal cliff tax deal passed by the Senate on January 1, 2013.

 

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