In true Congress style, a deal was passed at the last minute to keep the US from going over the fiscal cliff.
On Tuesday night the House passed a bill that will extend the Bush tax cuts for most of Americans, extend unemployment benefits, and delay spending cuts. Unfortunately, the bill left a lot of big issues on the table.
Here are the details:
The fiscal cliff related to both the tax laws that were scheduled to expire on December 31, 2012 and the spending cuts that were set to take place automatically on January 1, 2013.
The deal raises taxes for higher-income people (individuals who earn more than $400,000 and couples who earn more than $450,000), but keeps taxes the same for everyone else. Basically, the Bush tax cuts were made permanent for everyone except those who earn more than $400,000. If you earn more than $400,000 the Bush tax cuts will expire for you, causing your top tax rate to jump from 35% to 39.6%.
The lower and middle income groups didn’t escape increased taxes completely, however, as the 2% payroll tax cut was allowed to expire. That means most Americans will see their first paycheck in 2013 go down.
One good thing to come from the bill is the permanent adjustment to the Alternative Minimum Tax exemption. The AMT has never been adjusted for inflation causing more and more people to owe it every year. Without a legislative change, up to 30 million Americans would have had to pay the AMT for the first time on their 2012 income tax returns. The bill will permanently adjust the income exemption amount for inflation.
Parents will be happy to hear that the expanded American Opportunity Tax Credit, Child Tax Credit, Child Care Credit and Earned Income Tax Credit will all be preserved for the next five years. These credits were expected to return to pre-Bush levels on January 1, making many people ineligible for them.
Estate taxes were also addressed in this bill; the current exemption of $5.12 million will be preserved but the top tax rate will go up to 40% from the current 35%.
The deal also delayed the automatic spending cuts from happening, but only for two months. Congress will need to come up with a new plan for the deficit before March or the US will face another cliff scenario.
Two of the biggest spending cuts on the table were unemployment benefits and Medicare. The bill includes an extension of unemployment benefits for one year. Without this clause, more than 2 million people would have lost their unemployment benefits.
Regarding Medicare, doctors were facing a large pay cut in 2013 as Medicare reimbursement rates were set to be adjusted automatically to stay in line with GDP growth. This would have caused a 27% pay cut for physicians. While you may not be overly concerned with high income doctors taking a pay cut, you should be. Doctors fed up with looming pay cuts have been turning Medicare patients away, making it hard for consumers to get the care they need. The bill prevents this pay cut from happening, but just for one year. This issue will need to be addressed soon as it adds $31 billion to the deficit.
The bill will go to the White House next to be signed by President Obama. It is expected to be signed into law by Thursday.
Unfortunately, this is not the end of the fiscal cliff. According to CNNMoney, we have three more cliff-like deadlines in the next few months including the debt ceiling (not addressed in the current bill), the sequester (a series of automatic cuts in federal spending that will take place if Congress doesn’t act), and the continuing budget deficit. These must all be addressed by the end of March, so keep your seat belts on, the ride isn’t over yet.