For investors who prefer quick and aggressive fixes for problems, the New Year's Day deal in Congress to reach a stopgap measure to address the fiscal cliff is just the latest example of Washington's inability to govern effectively. With the House having approved the Senate proposal last night, the president is expected to sign the bill into law today.
Let's take a closer look at the fiscal cliff deal to tap into the immediate impact it will have in softening the blow of the fiscal cliff.
Whose taxes are going up?
Under the deal, anyone who earns a wage will see a rise in their taxes at some level. The bill doesn't restore the payroll tax cut that's been available since 2011, and so workers will see an extra 2% of their paychecks go toward Social Security taxes in 2013, with typical households seeing about a $1,000 jump in taxes over the course of the year.
But most people have focused on the expected rises in marginal tax rates for high-income earners, and for them, the key figures are $400,000 for single filers and $450,000 for joint returns. Those are the compromise figures reached between the House's $1 million proposal and the president's $200,000 and $250,000 limits. Above the agreed figures, the current 35% rate will rise back to its previous level of 39.6%. Add to that the 3.8% surtax that comes from health care reform, and the top possible rate will rise to 43.4%.
However, a lower threshold applies to the loss of personal exemptions and itemized deductions. Taxpayers will start seeing the impact of lost write-offs at incomes above $300,000 for joint filers and $250,000 for singles.
On the investing front, the maximum tax rates on dividends and capital gains would rise to 20%. However, those under the $400,000 or $450,000 limits would continue to pay a maximum of just 15%. In addition, estate taxes will rise somewhat, as the top rate will go to from 35% to 40% while the exemption amount remains stable at $5 million, with inflation adjustments for future years.
Whose taxes aren't going up?
Finding compromise on the rates that taxpayers pay may be the achievement that most people focus on most, but arguably the provision with the biggest long-term impact is the bill's permanent extension of relief from the Alternative Minimum Tax. By raising the AMT exemption and indexing it to inflation automatically going forward, Congress will avoid the annual ritual of having to go back and provide what's become known as the "AMT Patch." Given that the measure finally resolves what should have been decided 367 days ago, never having to address the AMT again will be a nice gift for upper-middle-income taxpayers in high-tax states, as they're the most likely to get snagged by the tax.
The ability to deduct sales taxes as itemized deductions also got extended. Without the measure, taxpayers in states with high sales taxes but no or low income taxes would have lost a valuable deduction.
In addition, a number of tax credits got extended. For families, the Child Tax Credit, the Child and Dependent Care Credit, and the American Opportunity Tax Credit for educational expenses will provide some relief, while the extension of the Earned Income Tax Credit affects low-income taxpayers regardless of family status.
Which companies will benefit?
The measure also included a number of business-related provisions. A key measure will avoid a 27% cut to Medicare reimbursement for doctors, potentially helping not only private-practice physicians but also hospital companies Tenet Healthcare (NYSE:THC) and HCA Holdings (NYSE:HCA) by ensuring the continuation of a key source of revenue.
Dean Foods (NYSE:DF) and other dairy companies will benefit from an add-on that extends favorable provisions for milk prices through September. Without the provision, prices for milk and other dairy items could have doubled as the government would have been required to set a price floor and buy dairy products directly.
Finally, an extension of wind-energy credits could help General Electric (NYSE:GE), American Superconductor (NASDAQ:AMSC), and other wind players. Alternative energy still relies on credits and other subsidies to help make it economically viable, and extensions help make the companies that provide alternative energy solutions more profitable.
Unfortunately, the fiscal cliff compromise leaves plenty of unanswered questions, including whether the debt ceiling will be raised, whether more spending cuts will occur under sequestration in two months, and whether unemployment benefits will be extended again when they expire next year. But given the huge level of contentiousness over the issues, having reached a deal at all is more of an accomplishment than many will ever give lawmakers credit for.