The U.S. went off the fiscal cliff. Other than the news, you may not have noticed because less than 24 hours later, Congress finally came together to pass a bill limiting the impact of that plunge. It was a less-than-grand compromise, with several issues left undiscussed. The proverbial can was kicked on down the road.
What the bill includes:
Income tax rates on individuals making more than $400,000 and couples making more than $450,000 will return to the rates in place before the Bush-era tax cuts. This means an increase of nearly 5 percent.
People below that income bracket will not see any increase on income taxes. In addition, a "fix" for the Alternative Minimum Tax was included.
Business tax credits related to research and experimentation and renewable energy were extended through 2013.
Estate taxes will increase from 35 percent to 40 percent on estates worth $5 million or more – a larger increase than Republicans wanted, but smaller than many Democrats were pushing for.
The deal also postpones the automatic budget cuts – also known as the sequester – for two months, leaving the new Congress that will be sworn in tomorrow (Jan. 3, 2013) to deal with them. To pay for this postponement, some cuts will still be made, but they won't have to be nearly as dramatic as they would have been without a deal. For example, instead of $50 billion in automatic cuts to the defense budget, this deal requires about $6 billion to be made at this time.
Emergency unemployment insurance benefits also were extended for an additional year.
What it doesn't include:
Capital gains tax rates for "high-income households" (the same ones mentioned before) were not protected by the compromise bill, meaning they will return to Clinton-era levels. In reality, they increase an additional 3.8 percent as a result of a provision in the Affordable Care Act, bringing the new rate to 23.8 percent.
The payroll tax holiday – the taxes withheld from paychecks for Social Security – was not extended. So while the income tax rate won't go up for most people, they will see a decrease of 2 percent as the payroll tax rate returns to 6.2 percent.
What it means for you:
The uncertainty has been a real killer for businesses, says Andrew Duguay of the Institute for Trend Research in the MDM Webcast, The 2013 Economic Outlook, available here. But the deal addressed many of the issues that would have an immediate impact on consumer spending.
As a result, there is a bit more clarity on where the economy will go in 2013, and that allows for more definitive business planning. "Plan on continued economic growth in 2013, but at a milder pace," Duguay says.
"We really are going to have to raise taxes at some point in order to reduce the deficit spending," he says. "We have a $16 trillion deficit and only $15 trillion in gross domestic product; 120 percent debt-to-GDP is not healthy and it's only going to continue to rise if we don't address these issues."