At around 2 a.m. on New Year's Day, the Senate passed a bill aimed at pulling the country back from the "fiscal cliff" of automatic tax hikes and spending cuts. The measure, hammered out by Vice President Joe Biden and Republican Senate Minority Leader Mitch McConnell, still needs approval by the House, which is expected to take up the legislation as soon as Tuesday. Here's what's in the Senate bill:
- Higher taxes on individuals earning $400,000 or more and families making $450,000 or more. Under that threshold, the Bush-era tax cuts would be permanent for all but the wealthiests households. The $450,000 threshold for families is a significant increase from Democrats’ initial proposal to raise taxes on Americans making $250,000 or more but it is lower than Republicans’ earlier proposal to raise taxes on households making $1 million or more.
- Tax rates on capital gains and dividends would rise for wealthier households. Taxes on capital gains and dividends would be held at their current levels of 15 percent for individuals making less than $400,000 and households with income of less than $450,000. They would rise to 20 taxpayers and households above those thresholds.
- Automatic spending cuts delayed for two months. The "sequester," which would impose steep, across-the-board cuts to domestic and defense programs, would be delayed for two months.
- One-year extension to unemployment insurance. Emergency unemployment benefits would be extended for a year. The extension was a priority for President Obama and congressional Democrats.
- One-year "doc fix." The measure would put off scheduled cuts in physician payments under Medicare.
- Averting the dairy cliff. Breakfast lovers, rejoice: A much-feared spike in milk prices, dubbed the “dairy cliff” because it was also set to kick in abruptly on Jan. 1, would be averted through a nine-month extension of certain portions of the farm bill. Other agricultural programs would also be extended through September.
- Personal exemptions phased out for individuals making over $250,000. Personal exemptions will be phased out and itemized deductions will be limited for taxpayers making over $250,000 and families earning more than $300,000.
- 40 percent estate tax. The estate tax would rise to 40 percent from its current 35 percent level, with the first $5 million in assets exempted. Democrats had earlier sought a higher increase to 45 percent and a lower exemption of $3.5 million.
- Permanent fix to the Alternative Minimum Tax. The alternative minimum tax was levied to ensure the wealthiest Americans paid a fair share of taxes. It was not indexed for inflation but is usually “patched” annually to prevent an increasingly large swath of middle-class Americans from being caught in its net. As part of the fiscal deal, the AMT would be permanently indexed for inflation.
- Tax breaks for working families. The deal includes extensions of the American Opportunity Tax Credit, which can be claimed for college-related expenses; the Child Tax Credit; and the Earned Income Tax Credit, which is a refundable federal income tax credit for low-to-moderate income working Americans.
- Business tax breaks. The Senate Finance Committee passed a package in August that tackled a variety of routinely expiring tax provisions known as extenders. These include popular tax breaks including those for research and development. That package might now pass as part of the broader cliff deal.
- Congressional pay freeze. President Obama recently authorized a congressional pay raise in a move that angered many congressional Republicans. Under the New Year's cliff measure, all members of Congress would see a pay freeze reinstated.
Although the bill would avert many of the year-end tax hikes and spending cuts that were set to kick in, it also failed to address some of the major issues that have divided Congress in recent months. Here’s what it left out:
- An agreement to raise the debt ceiling. The nation reached its borrowing limit on Monday and the Treasury Department has said it will use “extraordinary measures” to avert default as long as it can—likely into February. Then, Congress will have to once again take up the contentious issue of raising the country’s so-called debt ceiling. Last time, the negotiations resulted in a downgrade of the U.S. credit rating and a whipsaw month in markets. This time, the stakes will be just as high.
- Payroll-tax cut extension. A temporary, two percentage point cut to the payroll tax expired at midnight and was not renewed in the Senate’s bill. If you make $50,000, that’s an extra $1,000 in taxes you might be paying this year.
- A grand bargain. Lawmakers didn’t address the country’s long-term fiscal issues in this bill, namely a complicated tax code and rising entitlement spending.