After passing through the Senate on Monday, the House of Representatives approved legislation ending the fiscal cliff standoff late Tuesday.It was passed by 257-167 votes, as 85 Republicans voted yes alongside 172 Democrats.
While the legislation will prevent significant tax increases for most Americans and spending cuts to important government programs, members of both parties have reasons to be unhappy with the measure, which most agree does not solve the underlying issues present in our country’s fiscal policies.
How This Will Affect Your Bottom Line
The fiscal cliff solution has some significant implications for your wallet. Here’s the full breakdown.
The two-point payroll tax cut has expired. In the next couple of weeks, you will likely see more withheld from your paycheck. Individuals earning $113,700 or more will see nearly $200 more withheld each month.
Individuals making over $400,000 and couples with household incomes of over $450,000 will see their tax rates increase to 39.6% from 35%. For individuals and households making less than those thresholds, the Bush-era tax cuts have been made permanent.
Households making between $500,000 and $1 million will see income tax increases averaging slightly more than $15,000. Households with over $1 million in income will average slightly more than $170,000 in increased taxes.
The Alternative Minimum Tax has been permanently tweaked, so that middle-class workers who have not been paying it will continue to not be affected.
Joint-filers earning more than $300,000 and individuals earning more than $250,000 will see limits on personal exemptions and itemized deductions applicable to them when filing their taxes.
Capital Gains and Dividend Rates
For joint-filers earning more than $450,000 and individuals with incomes over $400,000, the capital gains and dividends rates will rise from 15% to 20%.
Estate and Gift Tax
The estate and gift tax exemption will remain at $5 million for individuals and $10 million for married couples, though the top tax rate on amounts over $5 million will rise five percentage points to 40%.
Education and Family Tax Credits
Provisions that expired in early or late 2013 have been extended for teachers ($250 deduction for classroom expenses); tuition and education expenses; conservation donation benefits; the American Opportunity Tax Credit (worth up to $2,500); and the Child Tax Credit and Earned Income Tax Credit, which affects those making $50,000 or less.
The dependent care credit will be extended, meaning $3,000 in eligible expenses for one child, and $6,000 for two or more children. Adoptive parents will see the tax credit increase from $5,000 to $10,000 for eligible expenses.
The annual contribution limit for Coverdell Savings Accounts (used for education savings) has been lifted to $2,000 from $500, and can now be used for elementary and secondary schools in addition to college. (Read all about tax credits.)
For one more year, businesses will continue to be able to deduct up to 50% of property and equipment (though not real estate).
More Battles Still to Come
In the next couple of months, the two contentious parties will likely butt heads again regarding the nation’s debt ceiling. Additionally, the $110 billion in automatic spending cuts that were supposed to kick in on January 1 have merely been pushed off for two months.
Many in Congress will also push for a tax overhaul, with Democrats likely to push for more tax increases. We’ll keep you covered on how your wallet will be affected, as new discussions regarding taxes and government spending start to develop.