Thanks to a last-minute agreement between the White House and Congressional leaders, the country will not be going over the so-called “fiscal cliff,” for now. The compromise extends a number of expiring tax cuts and programs while also forestalling for at least a couple of months the sequestration cuts scheduled to go into place. The House and Senate both passed legislation yesterday and President Obama is expected to sign it soon.
On taxes, the bill: permanently extends the Bush-era income tax cuts for families making $450,000 and less; includes a five year extension of the expanded Earned Income Tax Credit, Child Tax Credit, and college credit authorized by Obama’s stimulus bill; increases the taxes on capital gains and dividends for families making more than $450,000 from 15 to 20 percent; permanently patches the Alternative Minimum Tax (AMT) by adjusting it for inflation to protect middle class families; and modifies and extends the Bush-era estate tax cuts, among other things. It also reinstates limitations on itemized deductions for families making more than $300,000. Notably it does not extend Obama’s payroll tax cut originally included in the stimulus bill. The bill does include an extension of the Adoption Tax Credit. Federal extended unemployment benefits are extended for one more year under the agreement, the farm bill is extended for 9 months, and a one year “doc fix” is also included to prevent a cut in Medicare reimbursements to doctors. Finally, the sequestration cuts are delayed until March 1st, buying Congress two more months to work on a solution to replacing them.
While the compromise solves many of the vexing tax issues before Congress, it does not address long-term deficit reduction, or the pending increase in the federal debt ceiling that will be required soon. Over the next two months those issues as well as the sequestration cuts now scheduled to go into effect in March will be at the forefront of the next round of negotiations between President Obama and Congress.