Both sides get wins in tax deal

Senate GOP Leader Mitch McConnell (Ky.) and Vice President Biden have reached a deal on the tax portions of a “fiscal cliff” agreement. 

Republicans, President Obama and Democrats won and lost battles in the talks, with Obama and Democrats winning extensions on several middle-class tax breaks and forcing Republicans to agree to higher rates on wealthier households and on some investment income. 

But Republicans were able to raise the threshold for when the higher tax rates set in, and also won concessions from Democrats to extend a more generous estate tax. 

It’s unclear whether the agreement between McConnell and Biden will win support from House and Senate leaders. House GOP leaders told their members there would not be a House vote on Monday night, though they said a vote on New Year’s Day was possible. 

Senate Majority Leader Harry Reid (D-Nev.) also has not yet signed on to the tax deal, according to a leadership aide.

{mosads}The key part of the agreement would extend Bush-era tax rates for individuals making $400,000 and less in annual income and families making $450,000 and less. Higher incomes will be subject to a 39.6 percent tax rate, up from 35 percent. 

The president had wanted the threshold to be $200,000 for individuals and $250,000 for families, while Republicans had pushed for a higher threshold. 

But Obama and Democrats won concessions from Republicans to reduce the deductions wealthier taxpayers can use, by imposing rules known as “PEP and Pease.” These tax provisions that limit the deductions wealthier people can use would be reintroduced under the deal. 

PEP, the personal exemption phaseout, reduces the value of each personal exemption by 2 percent for each $2,500 above a specified threshold until the exemption is completely phased out. Pease, named after a former congressman, cuts itemized deductions by 3 percent of adjusted gross income above specified thresholds, but not by more than 80 percent, according to a summary by the Tax Policy Center. 

Under the deal, phaseouts of the deductions would begin at $250,000 for individuals and at $300,000 for families. The two provisions had been set to come back to life next year if Congress had taken no action, but with a $174,000 threshold for individuals.

The deal would also generate more revenue from investment income in a win for Democrats.

The estate tax would rise to 40 percent from 35 percent for estates valued above $5.1 million. Democrats had sought a 45 percent rate on estates above $3.5 million, while Republicans wanted the current rate extended. With no action, a 55 percent tax would have kicked in on estates valued at more than $1 million.

The deal would also impose new limits on deductions for wealthier taxpayers and generate more revenue from investment income.

It extends the capital gains and dividends rate of 15 percent for those making below $400,000 and families making below $450,000. Rates rise to 20 percent for those making above this threshold.

It would also limit deductions wealthier taxpayers can use to lower their tax burden. 

Democrats will get key tax breaks for the middle class in the deal, though they failed to get an extension of a 2-percentage-point payroll tax holiday. 

The deal would extend for five years the American Opportunity Tax Credit, Child Tax Credit and Earned Income Tax Credit, which are all tax breaks geared toward lower- or middle-income taxpayers.

The AOTC allows more taxpayers to qualify for tax credits to pay for college, expanding the threshold for a full $2,500 credit to individuals making $80,000 or less. A full $1,000 Child Tax Credit is available currently for each child of a couple making $110,000 or less. The EITC is specifically designed to help low-income earners.

The deal would extend bonus depreciation for one year, an important tax break for businesses that allows companies to write off 50 percent of investments in capital equipment. The break is set to expire in January. 

It includes a permanent indexing of the Alternative Minimum Tax to inflation so that it no longer threatens to raise taxes on the middle class. 

The tax portion of the agreement also extends a slew of corporate tax provisions, including for clean energy production such as wind energy. 

The entire “tax extender” package considered by the Senate Finance Committee is in the deal. The Finance package extended the wind energy production tax credit, which is hours away from lapsing, for one year through 2013.

Wind energy advocates have lobbied hard to prevent the credit from expiring Dec. 31.

The number of new U.S. wind energy projects has dropped sharply when the credit has been allowed to lapse in the past, which last occurred in 2004.

Conservative groups had urged lawmakers to let the wind credit lapse and cast the incentive as undue federal intervention in energy markets.

The Finance Committee plan also tweaked the way the credit is made available, requiring only that projects have begun construction within the next year to claim the incentive.

Wind industry officials say this will expand the number of projects that can take advantage of the one-year window.

The Finance plan also extends a series of other soon-to-lapse or already expired credits for efficient homes, biofuels and other measures.

—Ben Geman contributed to this story.