This evening, the House passed by a 257-167 vote the tax compromise. Here’s what this bill means:
Income Tax
– For 2013 forward, the Bush tax cuts were permanently extended except for the “wealthy.” That’s defined as $400,000 for individuals, $450,000 if married filing jointly (MFJ). Above this, the top marginal tax rate returns to 39.6%
– Welcome back, marriage penalty! (See above.)
– The Alternative Minimum Tax will no longer be patched each year; it is now indexed for inflation. Among other pluses with this, the tax filing season should begin normally in mid-January.
– Many tax credits were extended for five years, including the American Opportunity Credit, the Earned Income Credit, and the child tax credit (at a higher level than in the past).
– The ability to deduct sales tax instead of state income tax was extended for one year. Other deductions, such as the teacher expense deduction and the tuition and fees deduction, were also extended.
– Both exemptions and itemized deductions will again “phase out” at high incomes: $250,000 (single), $275,000 (head of household), and $300,000 (MFJ). Note that those itemized deductions which didn’t phase out in the past (e.g. gambling losses) will not phase out in the future, either.
Payroll Tax
The 2% payroll tax holiday has expired. Employee’s share of social security will return to 6.2% from 4.2%; self-employment tax increases to 15.3% from 13.3%.
Estate Tax
The estate tax exemption continues at $5 million base, with inflation adjustments ($5.12 million for 2012). The rate increases to 40% from 35% above the exemption.
The ‘sequester’ (cutting of expenses) was put off for two months. Coincidentally, that’s about when the debt ceiling will be reached. That battle–likely to begin in February–will be interesting as most Republicans want significant cuts and most Democrats don’t.
This year figures to be quite taxing for Congress (and that pun was intended).