'Cliff' deal avoids big tax hikes, but many will still feel tax bite

BY RANDY KREHBIEL World Staff Writer
Thursday, January 03, 2013
1/03/13 at 7:33 AM

For most Americans, the most important thing about the "fiscal cliff" bill passed by the House of Representatives Tuesday night is what won't happen.

The bill headed off income tax rate increases for more than 98 percent of taxpayers, and extended $77 billion in income tax exemptions and deductions for everything from child care to NASCAR tracks. It included a permanent fix for the alternative minimum tax, which should save middle-class families some money and Congress some future headaches.

The bill also delayed for two months the across-the-board federal spending cuts known as sequestration. The consensus among economists seems to be that those spending cuts, combined with the tax increases, likely would have slowed economic growth and perhaps even caused another recession.

Another part of the deal was a nine-month extension of the expiring farm bill, which gives agriculture producers some certainty about federal policy for the coming year and prevents potential havoc in commodity prices, particularly milk.

And, the bill maintains Medicare provider reimbursement rates at current levels.

Not part of the deal was extension of the two-year Social Security tax holiday. That means wage-earners will go back to paying 6.2 percent to Social Security on the first $110,100 of income after two years at 4.2 percent.

No Social Security taxes are paid on earnings above $110,100.

For most Americans, this 2 percentage point rise in Social Security taxes will be the most immediately noticeable effect of the so-called fiscal cliff - but it is a result of what the bill didn't do rather than what it does do.

For working Americans earning less than $110,000 a year, the deal was probably better than going off the cliff - but it's not necessarily great, either. It averted an income tax increase but allowed the 2 percent hike in Social Security taxes. It extended, in most cases for five years, tax exemptions and deductions for such things as child care and mortgage interest and, for the working poor and lower middle class, earned income tax credits.

The deal is arguably a little better for Americans earning between $110,000 and $400,000 a year. They avoided an income tax rate increase and, because of the cap on Social Security tax liability, the overall bite from the new Social Security tax rate is smaller.

They are also more likely to benefit from a part of the law that sets dividend and capital gains income at 15 percent for everyone except those in the top tax bracket. Their heirs may benefit from another section that exempts the first $5 million of assets from the federal estate tax and indexes the exemption to inflation.

For those making about $400,000 a year, the deal increases the top marginal income tax rate to 39.6 percent and sets the top rate for capital gains and dividend income at 20 percent. The latter is 5 points higher than it has been in the past decade, but for capital gains is the same as it was during the Clinton administration. Dividend income was taxed at the same rate as earned income until the early 2000s.

Original Print Headline: 'Cliff' deal heads off big tax hikes

Randy Krehbiel 918-581-8365
randy.krehbiel@tulsaworld.com