Stepping Back from the Fiscal Cliff - A Summary
SUMMARY OF THE AMERICAN TAXPAYER RELIEF ACT OF 2012 – H.R. 8
Adopted by Senate, January 1, 2013 2 a.m.
Adopted by House, January 1, 2013 11 p.m.
This legislation addressed some of the most immediate problems occurring at the year’s end: the expiration of the Bush tax cuts, the end of Emergency Unemployment Insurance benefits, the need to reauthorize the Farm Bill, the need to address the cut in payments for doctors under Medicare (the “doc fix”), and the need to adjust the Alternative Minimum Tax provisions.
While the legislation acknowledged the automatic spending cuts mandated by the Budget Control Act of 2011 (and delayed them by two months), it did not call for significantly more spending cuts, and did not focus on deficit reduction. The bill also did not include provisions relating to raising the debt limit. The debt limit will have to be increased by the end of February, according to the Secretary of the Treasury.
Taxes that will stay the same:
- Income tax rates for households with taxable incomes up to $450,000 (and individuals with incomes up to $400,000). These rates are extended permanently.
- Tax credits that were expanded in 2009 as part of the American Recovery and Reinvestment Act: the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit. These credits are extended for five years.
- A long list of business and individual tax breaks for a range of good and questionable purposes, known as "routine tax extenders.” (The good: some education, employment, energy efficiency, housing deductions. The questionable: a tax benefit for race car tracks, a production credit for Indian coal facilities placed in production before 2009.) The whole list was extended for another year.
- The capital gains and dividends tax rate will stay the same (15 percent) for households with incomes below $450,000 and individuals with incomes below $400,000.
Taxes that will increase:
To bring in about $600 billion in new revenues, the bill raised tax rates and made other changes affecting high-income households. The Tax Policy Center estimates that these changes will affect just .7 percent of all taxpayer households.
- Income tax rates on incomes above $450,000 for households and $400,000 for individuals will increase permanently from 35 percent to 39.6 percent.
- The estate tax will be set at 40 percent with an exemption of $5 million per person. This tax was most recently set at 35 percent. The new rate is set permanently, with inflation adjustments for the exemption.
- The tax on capital gains and dividends will increase to 20 percent for households with incomes above $450,000 and individuals with incomes above $400,000.
- Limits on tax deductions and exemptions for high income households will be renewed. The personal exemption begins to phase out at the $250,000 income level, and an itemized deduction limit begins to take effect at $300,000 income.
- The partial “payroll tax holiday,” which reduced the employee share of Social Security tax payments by 2 percent, was not extended. Employees will pay 6.2 percent, up from the 4.2 percent rate that was in effect since 2010.
Other tax changes:
- The threshold at which the Alternative Minimum Tax is imposed was adjusted upward and permanently adjusted for inflation.
The Budget Control Act that was passed in the summer of 2011 set caps on discretionary spending. These caps have been in effect in 2012. For 2013, lower caps were set to go into effect if the Congress was unable to come up with sufficient deficit reduction by another method. These caps would result in across-the-board cuts to all programs; this is what is known as “sequester.”
The sequester provisions in the Budget Control Act were not changed materially, but their implementation was delayed until March.
- Spending for the military function in the budget (known as “050”) will be set at $544 billion. Actual reductions in military spending would come to about $54 billion, compared to the same account in 2012. (The Pentagon found savings from “unobligated balances” to reduce the amount of additional cuts that would need to be made.)
- Spending on the domestic side of the budget and in international programs is also scheduled to be reduced (to $499 billion) as planned under the Budget Control Act, beginning in March.
Before these automatic cuts go into effect, Congress can still look for other ways to reduce deficit spending. The president has also expressed interest in working out better ways to allocate spending cuts, and a strong interest in further tax reform to bring in more revenues.
- The bill continues the Emergency Unemployment Insurance program, which provides continuing benefits to workers who still cannot find employment after their state-level unemployment benefits have run out. This is a one year extension.
- Scheduled cuts to physician payments under Medicare will be put off, yet again, for a year. This is known as the "doc fix."
- A nine-month version of the Farm Bill (at least some of its time-critical provisions) was added.
- The Special Diabetes Program for Native Americans was continued until 2014.
- A number of Medicare and Medicaid related programs were extended for a year.
A Note on Bill History:
On August 1, the House passed H.R.8, the Job Protection and Recession Prevention Act, extending all of the Bush tax cuts for one year, and outlining a program for writing and adoption of a comprehensive tax reform package. H.R. 8 was sent over to the Senate and the Senate took no action. When Senate leaders began to work out a deal, H.R. 8 was the natural vehicle for new legislation. So the Senate substituted its proposal for the language in the House bill, giving it a new title, American Taxpayer Relief Act, and keeping only the number.