Fiscal cliff deal ends payroll tax cut

(Bloomberg) — The House passed a bill Tuesday night to sidestep income tax increases for more than 99% of households and pull the nation back from the now infamous “fiscal cliff,” approving Senate-backed legislation in a 257-167 vote just after 11 p.m. President Obama signed it into law today.

As the White House and congressional lawmakers turn their attention to the next budget battle — the need to raise the nation’s $16.4 trillion debt ceiling — the largest economic impact for American families (and payroll managers) is the end of a 2% payroll tax cut, which will shrink paychecks for U.S. workers immediately.

The payroll tax cut’s lapse will pull more than $100 billion out of the economy in 2013 and is the primary reason why 77.1% of U.S. households will face higher taxes this year, according to the nonpartisan Tax Policy Center in Washington.

The tax bite is not as big as it could have been, though, as the last-minute cliff compromise permanently extends income tax cuts for 99% of U.S. households, only raising taxes on the income of individuals up to $400,000 and of married couples of up to $450,000, leaving those top earners with a marginal tax rate of 39.6%, up from 35% last year. Those same households would pay higher tax rates on their dividends and capital gains, including private-equity managers’ carried-interest income. The top rate will go to 23.8%, including taxes from the Patient Protection and Affordable Care Act.

Among the other details of the “fiscal cliff” deal: It extends expanded unemployment benefits and continues refundable tax credits for low-income families and college students. It also delays by two months automatic cuts known as the “sequester,” offsetting the $24 billion cost with a blend of additional revenue and spending reductions, half of which would come from defense.

Limits on itemized deductions and personal exemptions will also return, starting at $250,000 of income for individuals and $300,000 for married couples.

The deal would set the top estate-tax rate at 40%, splitting the difference between the parties’ positions. The per-person exemption will be more than $5 million and indexed for inflation.

The burden of higher taxes will fall hardest on the top 1% and particularly on the top 0.1% of taxpayers. Those making more than $2.7 million will pay an average of $443,910 more in 2013, or 26% of the additional burden, according to the Tax Policy Center. Households with income between $500,000 and $1 million will pay an average of $14,812 more.

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