Congress reaches "fiscal cliff" tax compromise

While the New Year's Eve "fiscal cliff" deadline came and went, the U.S. Senate and House of Representatives on January 1 adopted a compromise measure to address many of the major budget issues at stake.

In the early hours of the new year, the Senate overwhelmingly voted to extend the Bush-era tax cuts for most Americans, with higher-income taxpayers facing a rate increase. The Senate measure was later approved by the House, and President Obama signed it into law the following day.

The legislation includes the following provisions (see the table below for a comparison of 2012 and 2013 tax rates):

• For most taxpayers, income tax rates would remain unchanged at the 2001/2003 levels.
• Individuals earning more than $400,000 and couples earning more than $450,000 would be subject to a higher 39.6% top marginal rate.
• These same upper-income earners would face an increase in capital gains and dividend tax rates from 15% to 20%.
• Individuals earning more than $250,000 and couples earning more than $300,000 would see the return of a phase-out on personal exemptions and itemized deductions.
• The tax rate on large inheritances (estates valued at $5 million for individuals and $10 million for couples, indexed for inflation) would rise from 35% to 40%, the estate and gift tax regimes would remain unified, and spouses would continue to have access to unused estate tax exemption amounts.
• The alternative minimum tax (AMT) would be permanently adjusted for inflation, preventing more families from being subject to the AMT.
• 401(k) and other defined contribution retirement plans could provide plan participants with a newly expanded opportunity to convert their pre-tax savings in plans into Roth savings.
• The IRA charitable rollover provision would be extended for 2012 and 2013 (with special ability to make use of the provision for 2012 distributions).
• Unemployment benefits would be extended for one year.

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