While decent people were celebrating a new year, the Senate passed a “Fiscal Cliff” compromise early this morning.  The Wall Street Journal reports:

President Barack Obama and Senate leaders Monday reached a New Year’s budget agreement that would let income-tax rates rise for the first time in nearly 20 years, maintain unemployment benefits for millions of people and blunt the impact of spending cuts that were looming as part of the so-called fiscal cliff.

The long-sought compromise, which will raise taxes on income over $450,000 for couples, was approved by the Senate in the early morning hours Tuesday. The House was expected to consider it later in the day.

The legislation, HR 8,:

• Raises the top marginal rate to 39.6% for single filers with taxable income over $400,000 and joint filers over $450,000.
• Raises the capital gain rate to 20% for taxpayers subject to the 39.6% rate, but retains the 15% top rate for other taxpayers.
• Permanently “patches” the alternative minimum tax retroactive to 2012.
• Permanently extends the $5 million estate tax extension, including the transfer of the unused exemption of a deceased spouse, but increases the estate tax rate to 40% (from 35%)
• Re-enacts the phase-outs of personal exemptions and itemized deductions for taxpayers with AGIs exceeding $250,000 (single filers) or $300,000 (joint filers), providing a hidden and dishonest rate increase for taxpayers under the $400,000/$450,000 thresholds.
• Extends 50% bonus depreciation and the $125,000 $500,000  Section 179 deduction limit through 2013 (retroactive to 2012!)

The bill also miraculously extends most of the “expiring provisions” that technically died a year ago today through at least yesterday.

The one notable expiring provision that was allowed to die: the 2% reduction in employee FICA taxes (see here).  This will reduce take-home pay for everyone starting with the first paycheck of 2013.

While the big-ticket expiring provisions were permanently extended, the Senate ensured continuing work for their friends in the lobbying industry by passing the “expiring provisions” only temporarily.  Some of the notable extensions include

• The special exclusion for income from cancellation of qualified mortgage debt (through 2013)
• The optional deduction for state and local sales taxes (through 2013)
• The special break for conservation easement donations (through 2013)
• The exclusion from income of IRA donations to charity (through 2013).  This one allows a “do-over” for IRA distributions received in December 2012, if they are transferred to charity before February 2013.
• The five-year recognition period for the built-in gains tax  (through 2013)
• The R&D Credit (through 2013)

Oh, and the special depreciation break for “qualified motor sports entertainment complexes” was extended another year, so the republic is saved.

While the bill could require a scramble by payroll providers to update withholding tables, it should prevent the disruption of tax season; the AMT patch was the key to that.

Some bad ideas that had been tossed around failed to make the bill, including a cap of $25,000 or $50,000 on itemized deductions and a restriction on the value of itemized deductions to 28%.

The House still needs to pass the bill, so you have something to watch on C-Span today if you don’t care for parades or football.

Other coverage:

Robert D. Flach, A LAST MINUTE AGREEMENT

Kay Bell, Senate passes fiscal cliff deal

Janet Novack, The U.S. Is Going Over The Fiscal Cliff, But A Tax Deal Might Cushion The Landing.

Business Insider,  5 Things You Won’t Believe That Are In The Fiscal Cliff Bill That The Senate Passed At 2 AM While Most Americans Were Drunk

TaxProf, CBO on Fiscal Cliff Deal: $1 in Spending Cuts for Every $41 in Tax Increases

TaxGrrrl, No, Virginia, There Isn’t A Tax Cut Deal – Yet

Dean Zerbe, Fiscal Cliff Tax Deal: What Does It Mean for Small Business?

Tags: Business Insider, Dean Zerbe, Fiscal Cliff, HR 8, Janet Novack, Kay Bell, Obama Tax Policy, Robert D Flach, TaxGrrrl, TaxProf

This entry was posted on Tuesday, January 1st, 2013 at 9:43 am and is filed under Tax Roundup. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.