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Fiscal cliff cheat sheet: How the deal affects you

  • Deal avoids tax increases, but spending cuts left unresolved
  • Taxes expected to increase for 75% of American households
Congress passed a deal Tuesday to avert a fiscal cliff, but what will it mean for taxpayers.

Lawmakers finally broke through political gridlock late Tuesday night to pass legislation designed to avoid the fiscal cliff – a package of threatening tax increases and major spending cuts. While the compromise bill blocked most tax hikes, it only postponed significant spending cuts and left a variety of important issues unresolved.

The deal represents the largest tax increase in the past two decades, and despite open opposition from House Republicans who’ve been avid opponents of increasing taxes, the compromise passed a late-night vote on Tuesday. Earlier that morning, the Senate passed the legislation with an overwhelming vote of 89-8, and after a long day of semi-successful debate, the House finally voted 257-167 to pass the bill, sending it to President Obama for approval.

A few minutes after the bill passed in the House, Obama said the deal was a good one. "Thanks to the votes of Democrats and Republicans in Congress, I will sign a law that raises taxes on the wealthiest 2% of Americans, while preventing a middle-class tax hike that could have sent the economy back into recession and obviously had a severe impact on families all across America."

Read more: Over the cliff -- how do you feel about the deal?

But even though the legislation "protects 98% of Americans and 97% of small business owners from a middle class tax hike," according to the White House, most Americans will see their tax bill go up.

So what exactly does the fiscal cliff deal do/not do?


At the heart of the fiscal cliff deal are some of the biggest tax changes in years. The new law makes permanent the tax rates that have been temporarily extended since the Bush era. The deal permanently protects the middle class from being hit by the alternative minimum tax – a tax created in the 1960s for the country’s wealthiest taxpayers.

Increased tax bill

The deal means an increased tax bill for married couples earning more than $450,000 -- $400,000 for single taxpayers – as the rate jumps to 39.6%, from 35%. For those same households, capital-gains and dividend taxes will also increase to 20%, up from 15%. Estate taxes will then jump to 40%, up from 35%, for estates valued upwards of $5 million.

But that doesn’t mean all other workers are in the clear. Congress let the payroll tax break expire, which means taxes will likely go up for most Americans. As the payroll tax jumps 2% for all American workers, more than 75% of American households could see a tax increase from their 2012 tax levels, according to the Tax Policy Center. The deal also restores the Clinton-era limits on personal exemptions and itemized deductions for households earning more than $300,000 and for single taxpayers earning more than $250,000.

Other measures included in the deal:

  • Unemployment benefits extended for an additional year, providing up to 73 weeks of benefits to approximately 2 million jobless Americans.
  • Extension of farm programs that avoids spike in milk prices
  • Tax credits for college tuition (created by the 2009 stimulus package) extended for five years, benefiting about 25 million low-income families.
  • Low investment-tax rates remain in place
  • The “doctor fix” – Medicare providers avoid $11 billion spending cut, keeping reimbursement payments flowing
  • Renewable energy tax credit – and other existing business tax credits – extended for an additional year
  • Blocked congressional pay raise – deal cancels a $900 per year salary raise for members of Congress

New looming cliff

While the deal did avert some major tax issues, it really only addressed the tip of the iceberg when it comes to the economy's fiscal problems. What the deal failed to accomplish leaves Congress with some major imminent budget battles in the near future.

Not included in the deal is a rise in the debt ceiling and solutions to the government’s spending problems. The U.S. actually reached its debt ceiling on Sunday, and rather than putting in place significant spending cuts, Congress delayed the issue for two more months. That means the sequester – a series of cuts to the federal budget totaling $1.2 trillion over 10 years – is also delayed for two months.

Fiscal cliff averted, but bigger fights ahead

Debate over the debt ceiling and spending cuts will likely be pretty ugly, as Republicans are already unhappy about tax increases and the failure of the deal to actually address any of the federal government’s spending issues. Members of the new Congress that's sworn in on January 3 have a bumpy road ahead of them.

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