What the "fiscal cliff" bill means to taxpayers

Updated at 11:16 p.m. ET

(MoneyWatch) The Senate passed a deal to address the so-called "fiscal cliff" 90 minutes after the midnight deadline by a vote of 89 to 8. The bill then moved to the House of Representatives, which passed the measure 257-167 late Tuesday night.

In addition to the tax changes, the Senate and House agreed to a two-month delay in addressing $110 billion in government spending cuts (aka the "sequester"), which were due to go into effect Jan. 2. Some government agencies had already made arrangements to comply with the cuts, not knowing whether or not a deal would occur.

The plan would raise roughly $600 billion in taxes over 10 years, far less than the more than $2 trillion in revenue initially discussed by President Barack Obama and House Speaker John Boehner.

According to CBS News White House correspondent Mark Knoller, the Congressional Budget Office scoring of the bill projects a $329 billion increase in deficit in 2013; $3.9 trillion over 10 years.

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"Fiscal cliff": Effect on the economy

Whose taxes are going up?

All wage-earners: For the past two tax years, 160 million American employees' contributions to the Social Security program was 4.2 percent, down from 6.2 percent (this comes on the FICA line item of a paystub) on earnings up to $110,100 in 2012 and on earnings up to $113,700 in 2013. Despite legislative back-slapping about "preventing tax increases for the middle class", the average U.S. household that earns $50,000, will pay an extra $1,000 in taxes in 2013. For an individual earning the maximum 2013 cap of $113,700 or more, the increase would be $2,274, or nearly $200 per month.

Just before midnight, the Internal Revenue Service issued new withholding tables for 2013 reflecting the expiration of the 2001-3 tax cuts and the two-percentage point Social Security tax cut, but the IRS noted that the tables might change given pending legislation.

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"Fiscal cliff": Who is a "wealthy taxpayer?"

Wealthy earners: Individuals who earn more than $400,000 and couples who make more than $450,000 will see tax rates increase from 35 to 39.6 percent. Those income levels are up from Mr. Obama's levels of $200,000 and $250,000 and down from Boehner's $1,000,000 proposed threshold. Capital gains and dividends will rise to 20 percent from the current 15 percent for the same income thresholds. In addition to the capital gain and dividend rates, health care reform will levy a new surtax of 3.8 percent on capital gains for wealthy Americans, pushing up the top capital gains rate to 23.8 percent.

The Personal Exemption Phaseout (PEP) and the itemized deduction limit are set at $250,000 for singles and $300,000 for joint filers. These rules are meant to reduce or eliminate the value of personal exemptions for taxpayers earning more than the income threshold. The effect of the reinstatement of the limits amounts would increase taxes by just over 1 percent to the top tax rate as well as on capital gains rates.

What's extended?

Long-term unemployment benefits: At the beginning of the Great Recession, Congress enacted a temporary supplement to state-based unemployment insurance programs, which usually pay benefits for 6 months. The measure will be extended for one year, preserving benefits for 2 million Americans who were at risk for losing benefits at year-end.

Tax credits for low to middle wage earners: Among these provisions are the Child Tax Credit, the Earned Income Tax Credit and the Obama Opportunity Tax Credit (college tuition credits), deductions for $250 of teachers' classroom expenses; allowance of taxpayers to choose paying state sales taxes in lieu of state income taxes; a conservation donation benefit; and the direct charitable contribution of up to $100,000 of IRA assets for people 70 1/2 and older will all be extended for five more years.

Of these credits, the following are seen as the most valuable to low to middle wage earners:

-- The Child Tax Credit is up to $1,000 for each qualifying child who was under the age of 17 at the end of 2012. This credit can be claimed in addition to the credit for child and dependent care expenses, but phases out for married couples who earn over $110,000 and single filers who earn more than $75,000. (Details are in IRS Publication 972.)

-- The Child and Dependent Care Credit is available if you pay someone to care for your dependent who is under age 13, so that you can work or look for a job. The credit is 20 to 35 percent of your child-care expenses up to $6,000 -- the size of your credit depends on your income. This credit will be reduced significantly next year. (Details are in IRS Publication 503.)

-- The Earned Income Tax Credit is a refundable credit for married couples filing jointly with 2012 earned income under $50,270 and singles who made less than $45,060. The more children you have, the more money you receive. Your income and family size determine the amount of the credit, but the maximum credit is $5,891 this year. The income thresholds for this credit have increased over the past decade, and the maximum credit has increased since the recession. Next year, both phaseout limits and credit amounts will revert back to lower levels. (Details are in IRS Publication 596.)

-- The American Opportunity Tax Credit was set to expire at the end of 2010, but was then extended for an additional two years through December 2012 by the Tax Relief and Job Creation Act of 2010. The new credit makes the Hope Credit for higher education expenses available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. The full maximum annual credit of $2,500 per student is available to individuals, whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels.

Alternative Minimum Tax (AMT): AMT was created in 1969 to ensure that wealthy taxpayers pay at least some minimum amount of federal income tax, regardless of deductions, credits or exemptions. In essence, it is a flat tax with two brackets, 26 percent and 28 percent. Under the new deal, Congress has finally created a permanent inflation "patch" that would allow millions to escape AMT. Without the patch, the AMT would have hit 31 million taxpayers this year, reaching deeply into the middle class.

Certain business tax credits: There would be a one year extension of Research and Experimentation Tax Credit and Production Tax Credit and an extension of the 50 percent bonus depreciation rules, applicable to a wide variety of property and equipment, excluding real estate.

Medicare payments to doctors: Congress agreed to a one year extension of current Medicare reimbursement rates, shielding participating doctors from a potential 27 percent cut in reimbursements.

Even with a deal in place to avoid the cliff, however, the political debate over deficit-reduction is certain to continue. The U.S. Treasury Department notified Congress that the country hit its legal borrowing limit of $16.39 trillion -- the so-called "debt ceiling" -- on the last day of 2012. That could set the stage for a replay of the 2011 political brouhaha over government borrowing that, in putting off the toughest decisions on fiscal policy, led the U.S. to the edge of the fiscal cliff.

[AMJones1]

Extended Unemployment Benefits
It would be great if the long term unemployment benefits came with job placement. Continuing to provide income for people who cannot find work for a plethora of reasons is a welfare program that could be easily mitigated. I see this tax allocation as a major issue now & in the immediate future.

Medicare Benefits
When the topic of Medicare expenses being too high resurfaces will someone please remind the policy makes to take a look at the payment matrix...i.e. the details of how much doctors are making off the deal?

[ckartak]

I don't mind paying taxes, what I do mind is our government uses those monies for their personal piggy bank. For instance, I have known for years our social security taxes we pay in are really paying for a high interest loan our government has been paying for more than 30 years now. When is that loan going to be paid off? All social security payers are entitled to those benefits at retirement age but probably will not be able to because of that loan. Also, are all our government going to be on the same health care and social security benefits as the rest of America? That would be refreshing! Our government should be an example and not have separate services from what they are trying to throw at us. Also, they should not get free lunches, cars, vacations, air fares or anything over and above what corporations offer. Everyone working gets a paycheck (including the president) and they should spend their own money on anything extra just like the normal American does. This way empathy would steer our government in what would be best for all because we would all be on the same wave length on what is best for America in growth and jobs.

[bbglow]

The next step should include provisions for the wealthy to pay for their own wars and military. You want it, you pay for it with appropriate increases and seperate tax roll specifically targeted for that purpose and all troops receive the right to negotiate their individual cost to participate.

[[e-mail]]

I hear Obama will be proposing Greek language lessons to help prepare the country for the new fiscal reality.

[CBSNancy]

cliff? what cliff? the majority of america is at the foot of the cliff, struggling to get even a foothold. so i say, with utmost disrespect, may these priggish, self styled bookkeepers take a fast fkkng flying leap off the nearest 100 foot bridge to nowhere.

[Allah_speaking]

Government spending continues unabated. When you hear the term "domestic enemy" you need look no further than the President and the Congress.

[Walter L. Johnson]

President Obama raised federal spending by an annually compounded 1.4%, which is a modern rcoord for the lowest annual increase in the first 3 years of a Presidency, but is still increased not decreased. In fact politicians love to claim reductions in spending, when actual spending is increasing. That is because government budget workers inflate last year's budget by inflation for that kind of spending. For example if postage rates go up by 10%, government budget experts increase the budget for postage by 10% creating a new starting point for the following year budget. If Congress then decides agencies need to use mail less often by say a 5% reduction in mail volume, politicians will call that a spending reduction even though in reality postage spending will still increase about 5% in real dollars. This kind of misrepresentation if very common and bi-partisan in Congress.

If politicians had invented math no 3 numbers would ever come to the same total.

[SmBusMan]

Term Limits for Senators and Representatives!

[gerhardiii]

There already is one....

[commonsenseplz]

GerhardIII, you are wrong. They come up for re-election, but no term limits.

[jckbrn-2009]

Absolutely nothing was achieved - this nation is bankrupt and this gov't is more than bankrupt, managing nothing but their careers. Blame is their only concern and there will never be enough "revenue" to cover current spending. No need to break down "entitlements" when waste in foreign giveaways exceed support for citizen taxpayers who pay all "revenue". No benefit in partisanship, either. We're in this together & will suffer consequences of this chaos jointly.
Nothing was achieved beneficial to the nation or to citizen taxpayers - only self-serving politicians and media hacks interested in competition.

[nonpolitico]

JCKBRN-2009: Don`t worry, this is a short term Fix!
Confidentially Obama cannot cope with this, as he seems to have been putting Party before the US Citizen.
Inside 3 Months,the MARKETS,(remember them),will,unless politicians at last show that they are AWARE of the MASSIVE DEBT that USA now has, will DOWNRATE the USA!
Pres Obama must know this, so why is he still playing the blame game?
He has a record of vetoing the fiscal solution before when politics were set aside by both parties!
He is continuing this stance!
Can someone tell him that he is the President of the Whole United States? And that his desire for Socialism must be set aside in the interest of over 300,000,000 citizens?
If he determines Not to do this, he should be impeached, for no man or party dogma is as important as the interests of the United States!

[Walter L. Johnson]

Nonpolitico, The markets in the form of debt rating agencies will clearly not wait much longer before doing another downgrade of the U. S. Sovereign credit rating. When investors reach the same conclusion the won't buy U. S. National Debt without additional interest to compensate for the greater risk of principal and interest not being paid according to the bond terms.

[xavierzsada]

Congress has finally created a permanent inflation "patch" that would allow millions to escape AMT? Is this written wrong, because as it stands, it sounds as if the 'patch would ALLOW millions to ESCAPE the AMT... and I thought the point of the AMT was flat taxes of the rich, so that they couldn't avoid paying. Why would the patch allow millions to escape?

[Accountant_J]

The AMT was enacted in 1969 with set limits on eanings before reductions in itemized deductions kicked in. The issue was they were fixed amounts. And since then congress has had to pass patches to adjust for inflation the amount before reducing our itemized deductions. Without this change the millions would be the number of tax payers that just got out of paying more in extra taxes. The limits in 1969 were roughly 22K for single peple and 33K for a married couple filing jointly. So technically a single mom with a couple of kids making 24K a year could collect food stamps becasue she earns so little but pay Alternative Miniumum Tax because they are so wealthy.

Great to have it fixed.

[bjvander]

The AMT (alternative minimum tax) was to keep the "rich" from escaping paying at least a miniumial level of taxes. The rich as defined in 1969. The patch has been extended for inflation year after year because the cost of living adjustment wasn't included in the calculation. If allowed to expire, many of the middle class households making over 50K would find themselves included in the "wealthy" bracket. This is a good thing; however, in order for the US (as in all of us) to become econcomically healthy, all of us will have to give and pay, not just the wealthy in order for our children to have the same benefits that we have enjoyed. Who wants to work to pay for someone else's benefits.

[cleric77]

What's the big deal???... our fellow citizens who don't pay taxes will continue to be supported by our socialistic government so that they can stay on welfare and unemployment while the rest of our full-time employed citizens will be paying the increased tax rates.
Interesting...NO cut of government spending!

[RobertVBrand]

Cleric, you have become blind to your own interests, you are so afraid that some lazy lout will take advantage of you, while you pay your taxes and he rides free, enjoying free handouts from the government. You cannot see that it is the rich who are really gaming the system, with special tax deductions and low rates and credits. People who want to become rich will always work to achieve that goal -- they will not be discouraged by high tax rates, and they will always seek special favors by buying politicians with contributions to their reelection campaigns.

[ReallyFed-up]

Hey, you've got 3.7 million Americans paying 60% of the country's tax bill already, and now we're being asked to dig deeper and made to feel guilty that we don't contribute enough to society's well-being. I agree with Cleric, this country needs a spending overhaul to curtail the excesses that have placed us in this position. If that means cuts in entitlements, defense, and government subsides, then let's rebalance the equation so this country can get back on it's feet again and we can broaden the tax paying base to support our country's needs.