A fiscal cliff deal sailed through the Democrat-controlled Senate late in the night on New Year's Eve in an 89-8 vote.
The proposed deal then headed to the Republican-controlled House on New Year's Day, expected to meet at least some opposition from a party that has lobbied during most of the fiscal cliff negations for no tax increases at all. It went through with a 257 – 167 House vote.
At the deal's forefront was maintaining tax cuts for singles earning less than $400,000 and couples earning less than $450,000. The tax increase marks the first time in two decades that rates will rise for the wealthiest Americans.
While it does save millions of middle-class taxpayers from increases, workers will still feel the pinch because the payroll tax holiday has expired.
Also saved were benefits for some two million unemployed workers who were on the brink of losing their federal checks.
The measure postpones the biggest and thorniest part of the fiscal cliff deal until March, when Congress will again have to wrangle over steep spending cuts that were set to kick in on Wednesday to defense and other industries.
Plus, nothing was resolved regarding the $16.4 trillion debt ceiling that we reached Monday.
Here are a few major changes that will hit your paycheck and savings.
The Devil's in the Details
- Payroll Tax Holiday Expired
About 77% of American households will still be subjected to higher federal taxes in 2013 under the new deal, according to projections from the Tax Policy Center.
The hike will come from an increase in Social Security payroll taxes, temporarily trimmed two percentage points in 2012. The share workers pay into Social Security has now jumped from 4.2% to 6.2%, costing an extra $1,000 on average for U.S. households.
Data from the Tax Policy Center showed that households earning $40,000-$50,000 a year will see an average tax increase of $579 this year. Those bringing in $50,000-$75,000 annually face an increase to their tax bill to the tune of $822.
- Higher Income Taxes on the Wealthy
America's highest earners will see income rates rise to 39.6% from 35%.
The Tax Policy Center estimates that households making $500,000 – $1 million will shell out $14,812 more in taxes. Those earning more than $1 million will see their bill increase by $170,341.
- Paying for Obamacare
In order to pay for President Obama's healthcare reform law, a fresh 3.8% tax will be tacked on investment income for individuals making more than $200,000 and couples making more than $250,000.
Who Won the Fiscal Cliff Fight?
The White House deems the deal a win for the president.
"The president has delivered on a major campaign promise and broken Republicans' backs on a 20-year pledge" to oppose tax rate increases, a White House Official told the Wall Street Journal.
But President Obama and his party may not revel in the victory for long.
"The president just doesn't play well with others. I do think he's up for a bumpy road given his tactics," Rep. Mike Rogers, R – MI, said following word of the deal.
Republicans will use spending cuts as leverage when talks resume about what to do with the debt ceiling.
Republicans will want some very steep cuts in government spending because raising taxes on the wealthy will not make the slightest dent in bringing down the country's $16 trillion debt.
Although Americans breathed a sigh of relief at the rushed deal, plenty of uncertainty remains.
The slowly recovering U.S. economy is sure to feel a jolt.
While we may have avoided a hard fall off the fiscal cliff, we are sure to feel a fiscal drag in 2013.
Related Articles and News:
- Money Morning:
What If There's No Fiscal Cliff Deal
- Money Morning:
Fiscal Cliff Deal Gets Lost in the "Blame Game"
- Money Morning:
2013 Tax Changes: Watch Out For These Hits
- USA Today:
Deal means taxes will rise for most Americans
- Washington Post
Congress approves "fiscal cliff" measure
- The Wall Street Journal:
Lack of Grand Bargain Complicates Obama's Priorities