Senate-Approved Bill Would Avoid Fiscal Cliff

Earlier today, the United States Senate, by a vote of 89-8, passed H.R.8, the “American Taxpayer Relief Act” (the “Act”). The Act would prevent many of the tax hikes that were scheduled to go into effect today and retain many favorable tax breaks that were scheduled to expire, but it would also increase income taxes for some high-income individuals and slightly increase transfer tax rates. Vice President Joe Biden and Senate Minority Leader Mitch McConnell (R-KY) are reportedly credited with negotiating the Act after weeks of failed talks. The House has been called into session today for consideration of the Act.

The Act’s key changes follow:

Income taxes. The Act would keep the “Bush” tax rates intact for individuals with taxable income under $400,000 ($450,000 for married taxpayers, $425,000 for heads of household). Income above these levels would be taxed at a 39.6% rate.

AMT patch. The Act would permanently patch the alternative minimum tax (AMT).

Capital gains and dividends. The Act would raise the top rate for dividends and capital gains from 15% to 20% for taxpayers who would be subject to the new 39.6% bracket.

Deduction limitations for high-income individuals. The Act would reinstate the “Pep and Pease” limitations on the personal exemption and itemized deductions for taxpayers exceeding certain income thresholds.

Transfer taxes. The Act would prevent steep increases in estate, gift and generation-skipping transfer (GST) tax that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation). However, the Act would also permanently increase the top estate, gift and GST rate from 35% to 40%.

Individual extenders. The Act would extend a host of individual provisions, including the treatment of mortgage insurance premiums as qualified residence interest, deductions for State and local general sales taxes, and the above-the-line deduction for qualified tuition and related expenses.

Business tax extenders. Many key business tax breaks would be extended including depreciation provisions, notably including bonus depreciation, and the research and work opportunity tax credits.

Other items. The Act would extend unemployment insurance and many health and energy-related provisions, as well as provide a doc fix and extend farm legislation. It would not, however, extend the payroll tax cut.