At a cost of more than $100 billion, the bill also nudges the nation toward greater use of alternative energy resources, renews popular tax breaks for businesses and individuals, and extends relief to disaster victims.
It includes a provision to ensure that mental health problems get the same level of insurance benefits as other medical treatment. The bill passed 93-2.
"The economy is struggling," Senate Finance Committee Chairman Max Baucus, D-Mont., said. "At times like these, Americans need tax cuts that they've come to count on, that can help them get by."
But with time running out in this session of Congress, the House is choosing to diverge from the Senate by taking up a bill that fully pays for the business and individual tax breaks by eliminating some tax breaks for hedge fund managers and for corporations doing business overseas.
The Senate only partially offsets the costs of its business and individual tax breaks, and Senate leaders warned that any changes could doom the bill. The House could take up its version as early as Wednesday.
The White House has signaled its support for the Senate bill, reports CBS News White House correspondent Mark Knoller.
"Despite concerns with some provisions in this bill, it's a bill the President can sign, and we strongly encourage the House to pass it," said White House spokesman Tony Fratto. "We don't believe the appropriate way to protect 26 million Americans from the Alternative Minimum Tax is to impose tax increases on other Americans. We also strongly support the extensions of tax credit for research and experimentation expenses, incentives for charitable giving, and the tax incentives for renewable energy."
The tax bill is one of several major efforts to right the teetering economy in what could be the final week of this session of Congress. Lawmakers are trying to reach agreement on a, and Democrats are trying to put together a stimulus package to help average citizens get through the current economic crisis.
The alternative minimum tax was enacted in 1969 to catch a few very rich tax dodgers. But it was never adjusted for inflation and now Congress must act every year to ensure it doesn't catch more people.
Without action, those affected could grow from about 4 million to 25 million, at an average tax increase of $2,000. The fix would cost $64 billion spread out over 10 years.
Last year Congress, after a prolonged fight over whether to pay for the fix with new tax revenues in other areas, waited until late December to pass legislation, causing delays in some IRS refund payments. The AMT patch this year, as last year, is not paid for.
The first segment of the three-part tax bill was a $17 billion measure to spur investment and create jobs in the renewable energy industry. The energy legislation extends for eight years, through 2016, investment tax credits for the solar power industry and for homeowners who install solar and wind equipment.
Taxpayers can claim a credit of up to $7,500 for purchasing plug-in electric cars, and production credits are extended to wind, biomass and marine - waves and tide - facilities. There are incentives to use smart meters for more efficient home energy use.
A study commissioned by the Solar Energy Industries Association found that the eight-year extension would more than triple investment during that period, to $325 billion, and almost triple employment in the industry, to 440,000 in 2016.
Sen. Maria Cantwell, D-Wash., who helped put the energy package together, said the solar industry investment would provide power for more than 7 million people.
The measure drew opposition from the National Wildlife Federation, which objected to incentives for oil shale, tar sands and coal-to-liquid production it said was harmful to the environment.
While enjoying wide bipartisan support, the tax bill has struggled to get through the Senate this year. Senate Democrats have been caught between Republicans and the White House who oppose any new taxes to offset the costs of the tax relief and House Democrats demanding that the bill be paid for to avoid adding to the federal deficit.
"Don't send us back something else," Senate Majority Leader Harry Reid, D-Nev., said in an appeal to the House. If there are changes, he said, "it will die."
The Senate bill offsets the energy measures by limiting tax breaks for the oil and gas industry and pays for about $25 billion of the $68 billion in individual and business tax breaks.
Among the extensions of expiring tax breaks, the biggest is the $19 billion research and development tax credit. Also renewed are deductions for state and local general sales taxes, higher education costs and teachers' personal expenses.
The legislation additionally includes more than $8 billion in tax relief for Midwestern states hit by natural disasters this summer and for the more recent victims of hurricanes in Texas and Louisiana.
It requires private insurance plans that offer mental health benefits to offer benefits equivalent to those of medical-surgical treatments.