Well, color me surprised. The House voted on the budget after all, and they voted up or down, rather than amending the Senate bill. The House voted “Yea” and they did so quite convincingly (257 YEA to 167 NAY).
Here’s what the bill does:
Income tax
- The tax cuts were extended – permanently – for all but those at the top. For this purpose, the top means $400,000 for individual filers and $450,000 for married couples. The top tax rate will increase to 39.6% from 35%.
- The Pease and PEP (personal exemption phaseout) restrictions on limitations were also extended. The applicable thresholds for the caps are $250,000 for individual filers and $300,000 for married couples.
- Capital gains tax rates and dividend tax rates stay low for most taxpayers. Taxes on capital gains and dividends will increase to 20% for taxpayers at the top.
- The alternative minimum tax (AMT) will be permanently adjusted for inflation. This is in red for a reason. Congress hasn’t fixed this in more than 40 years. Each year, they put a “patch” on it instead of actually doing anything to fix it. This, for me, is the biggest surprise in the bill.
- Also extended for five years (not permanently) are a number of individual tax credits including the child tax credit, the controversial earned income tax credit (EITC), and the American Opportunity Tax credit (the souped-up version of the Hope Credit).
- On the deduction side, a couple of above the line deductions were extended, including the deduction for school teacher’s expenses and the tuition and fees deduction. On the itemized deduction side, the option to deduct state and local sales taxes in place of state and local income taxes was extended for a year.
- Surprising many (govtrack.us gave it a 1% chance of passing as a separate bill), the parity between the exclusion from income for employer-provided mass transit and parking benefits was extended. Without the extension, parking benefits would be disproportionately higher than those for mass transit.
- On the charitable side, while the Pease limitations were kept (mostly) at bay, the opportunity to make tax-free distributions to charitable organizations was extended. This is good news for retirees who want to donate their IRAs – and charities who want their money.
Payroll tax
- Payroll taxes are going up. As expected, the payroll tax holiday is allowed to expire. The employee portion of Social Security contributions will return to 6.2%.
Estate tax
- The federal estate tax exemption remains at $5.12 million (indexed for inflation). The top tax rate will be 40%, higher than the current rate of 35% but lower than what would have happened under the lapse.
Sequester
- The sequesters (automatic cuts) have officially been pushed off for two months.
Other stuff
- Long-term unemployment benefits are extended for one year.
- The so-called “doc fix” is also in play for one year. That means that the planned cuts – 27% – in Medicare reimbursements for physicians will be pushed off until 2014.
- A law allowing the IRS to communicate with prisons (yes, this is a big problem when it comes to fraud) was made permanent.
- The farm bill was also extended; no $7 gallon jugs of milk in 2013.
I don’t think the business tax provisions were terribly significant but some of the extensions deserve a nod. I do think the political capital involved in this one will have long-reaching effects… Look for that commentary in another post (otherwise, this one will never end).
The bill has yet to be enrolled (a fancy way of saying the two versions of the bills from the House and Senate have to match as one document) but you can read the Senate version here.
And if you’re keeping score – and want to know how well I guessed what might happen since we all know I missed the boat on the timing of the vote – you can check out Facebook. Check tomorrow, though. It’s been a long, long day.
