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Tax Changes Are Coming- Cliff Agreement

1/2/2013

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Congress has apparently reached agreement on new tax rates to avoid the Fiscal Cliff, although they're still fighting about spending cuts.
The details on taxes are still leaking out.

Here's the best sense of the deal that have been reported so far (these are from the New York Times.)

If a deal is actually signed:

* Income taxes will stay at current rates for households making less than $450,000 per year ($400,000 for individuals). This is a huge tax cut relative to the Fiscal Cliff tax rates, which would have increased taxes for everyone.

* Income taxes for income above $450,000 ($400,000 for individuals) will revert to the Clinton era 39.6% from the current 35%. These households constitute fewer than 1% of American households.

* Capital gains and dividend taxes for households earning over $450,000 will rise from 15% to 20%. This income will also be hit with the 3.8% surcharge for Obamacare, so the full increase will be from 15% to 23.8%. For dividends, this is still a massive cut from the Clinton-era rates of 40%.

* Some tax deductions for households earning more than $250,000 will be phased out. So, on a net basis, taxes may rise for about 2% of American households.

* The payroll tax will likely revert back to 6.2% from 4.2% for the first $110,000 of income (per the Washington Post). This will effectively increase taxes on almost everyone.

* The estate tax will stay basically the same: The threshold for taxable estates will remain at $5 million, with a 40% tax rate over that level.

All of these tax rates would be "permanent," meaning that Congress would have to agree to change them. This is a big deal. Almost every fiscal agreement reached by Congress since the Bush tax cuts of 2001 has been scheduled to phase out at a future date.

* Some tax cuts for middle- and lower-income households would be extended for 5 years. These include a child credit, the earned income tax credit, and a tuition credit.

* Unemployment benefits would be extended for one year.

All these changes are expected to raise about $600 billion in new revenue over 10 years versus current tax levels. That's obviously far less revenue than would be raised if the Fiscal Cliff tax rates were enacted.
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