Planning to Avert the Cliff

December 20, 2012

Later today, the House is expected to vote on Speaker Boehner’s Plan B to avoid part of the fiscal cliff in two separate bills.

With the current tax rates expiring at the end of this year, if nothing is done, taxes will increase to Clinton-era levels.  The first bill, which would address the expiring tax rates, is the Permanent Tax Relief for Families and Small Business Act.  It would:

  • Permanently extend the current income tax rates for all Americans, except those earning more than $1 million a year.
    • Those earning $1 million or more would pay an income tax rate of 39.6 percent.
  • Permanently extend the death tax rate at its current level of 35 percent, with the first $5 million of an estate exempt from taxation.
  • Permanently extend the current tax rates for dividends and capital gains.
  • Permanently repeal the Alternative Minimum Tax (AMT).
    • In 1969, Congress created the AMT as a separate tax system. The stated goal of the AMT was to make sure the wealthiest Americans owed some income taxes. In 1967, the Treasury secretary reported 155 people with incomes more than $200,000 owed no income tax because they were able to use tax code deductions and credits to bring their tax liability to zero. The AMT isn’t indexed for inflation, which means more and more middle class families now fall under the AMT.  To limit the impact of the AMT, Congress traditionally passes a “patch.” “Patching” means raising the income level automatically exempt from the AMT, usually for one year or two.” For 2011, the AMT exemption for a single person is $48,450.  As of now, there is no patch for 2012.  The IRS commissioner warned that as many as 30 million additional taxpayers would fall into the AMT if nothing is done.

The second bill, the Spending Reduction Act, would address the second part of the fiscal cliff, which involves the sequester spending cuts.  It would:

  • Cancel most of the discretionary spending sequestration scheduled to occur on January 2, 2013, and replace it with other cuts such as food stamps and health insurance grant cuts.

The White House said it would veto the legislation if it reached the president’s desk.

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