Winners and losers of the 'fiscal cliff' fix

two men tug of war cliff
  • The child tax credit was not halved, as expected, to the collective relief of parents.
  • Coverdell Education Savings Accounts were made permanent by the new law.
  • The end of the payroll tax holiday means workers' FICA taxes revert to 6.2 percent.

The "fiscal cliff" drama that ended at the midnight hour on the first day of the year was essentially a knock-down drag-out fight over how to close the budget deficit, but the result may significantly impact your personal finances over the coming years.

Itself a product of an eleventh-hour compromise on authorizing more government debt in 2011, the cliff would have automatically imposed deep cuts in government spending, which, along with the expiration of the 2001 and 2003 President George W. Bush tax cuts, would have punched a half-trillion-dollar hole in the economy.

Instead, Congress passed a lengthy compromise bill, formally known as H.R. 8, the American Taxpayer Relief Act of 2012, which was signed into law by President Barack Obama. It staves off many of those spending cuts and tax increases, but does little to actually address what the debate was ostensibly about, says Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget.

"There are a lot of odds and ends in this bill," Goldwein says. "This is a long, substantial bill even though it does very little to reduce the deficit or bring our debt under control in a meaningful way."

Here's a breakdown of who won, and who lost out, in the fiscal cliff fix.


Families with children. The Bush tax cuts of 2001 doubled the child tax credit and made it refundable, meaning you can actually get cash back from the government if the credit exceeds your tax liability. The fiscal cliff extends those changes for another five years, until the end of 2017.

For families with kids who drink a lot of milk, there was one other big benefit: The expiration of a farm bill that would have substantially increased the price of milk was extended until the end of 2013, Goldwein says.

Students and their parents. Students and their parents got a couple of key bennies in the fiscal cliff fix, primarily related to education. The law makes permanent Coverdell Education Savings Accounts, which allow parents to save up to $2,000 per year tax-free for education expenses, including private school tuition.

It also extends through 2013 a tax deduction for tuition, fees and other qualifying expenses that can be claimed whether or not you itemize, known as an "above-the-line" deduction.

Finally, the American opportunity tax credit, created by the 2009 stimulus, which provides a $2,500 refundable credit to cover college expenses, was extended until 2018.

Retired philanthropists. The fiscal cliff fix extends through 2013 a provision in the tax code that allows holders of individual retirement accounts and other retirement accounts to make direct distributions to charities without having to include them as income on their tax return, says Michael Eisenberg, a certified public accountant and personal financial specialist at Eisenberg Financial Advisors in Los Angeles.

"Somebody can make a distribution from their IRA directly to a charity, and they don't pick that up as income," he says.

The mass affluent. Those making between $200,000 and $400,000 a year can breathe a sigh of relief; their taxes will fall into the existing 33 percent and 35 percent tax brackets. The Obama administration had initially sought to raise tax rates for those making more than $200,000 as single filers and $250,000 as jointly filing couples, but a compromise with House Republicans raised the bar to $400,000 for singles and $450,000 for couples.

Medicare recipients. The new law includes the latest edition of the annual "doc fix," which prevented a 27 percent drop in reimbursements to doctors for providing Medicare services. While the biggest beneficiaries of the doc fix were obviously doctors, Medicare patients also would have been affected had the fix not taken place, Goldwein says.

"I would think that if physicians immediately saw their payments cut by a quarter, they would stop seeing Medicare patients," he says.


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