Summary of the Deal

Below is a brief summary of the key provisions of the compromise law which is formally entitled The American Taxpayer Relief Act. 

·                     Income tax rates: Current income tax rates are extended for families earning $450,000 or less and individuals earning $400,000 or less annually. Taxpayers earning more than these thresholds will be taxed at 39.6%, up from 35%.

·                     Investment tax rates: The top capital gains and dividend rate remain at 15% for those below the $450,000/$400,000 income thresholds, and are increased to 20% for those with incomes above those amounts. Current law remains in place for carried interest.

·                     Estate tax: The current $5 million per-person estate tax exemption remains (with the $5 million indexed for inflation) but the rate is increased to 40% from the current 35%.

·                     Tax extenders: Individual and business tax extenders are extended seamlessly through 2013.

·                     Allows businesses to recover the cost of certain leasehold improvements and restaurant and retail property over a 15-year period, rather than over 39 years

·                     Bonus depreciation: The 50% bonus depreciation provision is extended for one year.

·                     The Research and Development (R&D) tax credit was extended through 2013 and made retroactive for 2012

·                     Work Opportunity Tax Credit extended one year; Section 179 – keeps in place the 2010/2011 levels of a maximum amount of $500k and $2 million phase-out for 2012 and 2013;

·                     Accelerated Depreciation —provides for 50 percent expensing for qualifying property purchased and placed in service before January 1, 2014 (and January 1, 2015 for certain long-term assets and transportation).

·                     Alternative Minimum Tax (AMT): The individual AMT is patched permanently.

·                     PEP and Pease: The personal exemption phase-out (PEP) and overall limit of itemized deductions (Pease) is reinstated for families with incomes over $300,000 and individuals with incomes over $250,000.

·                     Other credits: The American Opportunity Tax Credit, the enhanced Child Tax Credit, and the enhanced Earned Income Tax Credit from the American Recovery and Investment Act (the "stimulus") are extended for five years.

·                     Doc fix:  The patch on the 29% cut in Medicare provider payments is extended for one year.

·                     Sequester delay:  The $109 billion spending cuts mandated by the Budget Control Act are averted for two months due to $12 billion in spending cuts split evenly between defense and non-defense spending and $12 billion of increased revenues applied as an offset.

·                     Extended unemployment insurance:  Federal extended unemployment insurance will continue for another year.

Additional details may be found in these two documents.

·         The full text of the compromise law can be found at: http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf .

Ironically, the net result of the compromise is that President Barrack Obama effectively embraced the preponderance of the Bush tax cuts.

Looking Forward

Because the deal simply moved the trigger date for the “sequester” of automatic spending cuts totaling $1.2 trillion over nearly a decade from January 1 to March 1, expect renewed debate to begin with the start of the 113^th Congress on a long-term plan for deficit reduction.  By most estimates, the U.S. government will reach its $16.4 trillion borrowing limit by the end of February – so wrangling will also renew the debt ceiling, entitlement reforms, and spending cuts.  Additionally, the current stopgap spending measure expires on March 27, setting up either an additional catalyst for a broader brinksmanship scenario or yet another moment in a series of showdowns that continues from last year.

Prospects for comprehensive tax reform and entitlement reform remain uncertain, with both sides appearing unwilling to reach meaningful compromises without an imminent deadline with severe consequences. Since Congress is now likely to be consumed by a series of short-term budget battles, such partisan wrangling may distract Congress from the complicated process of achieving comprehensive tax and entitlement reform.