The U.S. House by a vote of 257-167 and the U.S. Senate by a vote of 89-9 approved the Senate's plan to avoid most of the fiscal cliff. The plan would raise taxes on upper-income households, provide a permanent fix to the Alternative Minimum Tax, and postpone spending cuts for two months.
It does not prevent a 2 percent increase in payroll taxes, which will have a significant impact on consumer spending growth in the near term, nor does it address the federal debt ceiling. The deal sets up further confrontation over spending cuts, the debt ceiling, and the longer-term budget outlook.
A few key summations are: Marginal tax rates rise permanently to 39.6 percent from 36.0 percent for upper-income households, those with incomes above $400,000 and families with income above $450,000.
Marginal tax rates for others permanently remain lower.
The tax rate on capital gains
and dividend income for upper-income earners permanently rises to 20 percent from 15 percent, but stays permanently the same -- 15 percent -- for everyone else.
The estate tax will rise to 40 percent with a $5 million exemption, which will now be indexed to inflation.
Tax breaks for low-income earners will be extended for five years.
Limits on tax exemptions and deductions for upper-income earners will be reimposed: Personal Exemption Phaseout will be set at $250,000 and the itemized deduction limitation starts at $300,000. Note that these provisions do not alter the municipal bond exemption.
Scheduled cuts to doctors under Medicare will be postponed for a year, to be paid for by unspecified cuts to spending.
Federal unemployment insurance benefits will be extended for another year.
The individual payroll tax rate rises from 4.2 percent to 6.2 percent. For someone making $60,000 per year, this would amount to a reduction in take-home pay of $100 per month.
With approval of this deal, the market responded positively and after this near-term euphoria subsides, market participants are likely to turn their focus to Washington's unfinished business on the debt ceiling, spending cuts, and reform to entitlement programs.
Jeff Zientara, with Raymond James Financial Services in Lakewood Ranch, can be reached at 941-750-6818.
