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.

The unemployed. In response to the sky-high unemployment of recent years, Congress gradually extended unemployment benefits from the traditional 13 weeks to as long as 99 weeks to help displaced workers and put a floor under the sagging economy, Goldwein says. While they’ve since cut that back somewhat as unemployment has eased, the extension of unemployment benefits in the fiscal cliff fix through 2013 will help keep millions who have been out of work for more than 13 weeks from losing benefits, he says.

Underwater homeowners. Homeowners who have mortgage debt canceled also got a break under the fix, says Eisenberg. Forgiveness of mortgage debt through a short sale or some other means won’t be treated as taxable income in 2013.

Low-income workers. A 2009 change in the earned income tax credit, which expanded cash tax refunds to low-income workers, was extended for another five years in the fiscal cliff fix.


Workers. While the fiscal cliff fix extended many tax breaks for individuals and businesses, the 2010 payroll tax cut that dropped employees’ payroll tax contribution 2 percentage points, from 6.2 percent to 4.2 percent on income up to $106,800, was allowed to expire. The ceiling on wages subject to the FICA tax has since increased to $113,700 for the 2013 tax year.

For a worker making $50,000 per year, the tax increase amounts to an extra $1,000 in payroll taxes paid annually, says Eisenberg.

The mass affluent. Just because they avoided a higher income tax rate doesn’t mean the mass affluent will get away entirely unscathed from the fiscal cliff fix, says Eisenberg.

“There is a phaseout of itemized deductions for single people making over $250,000 and couples with income over $300,000,” Eisenberg says. While their marginal tax rates may not be going up, such deductions, which cover everything from mortgage interest to miscellaneous business expenses, will shrink for higher earners in 2013, increasing their overall tax burden, Eisenberg says. Their Schedule A claims will be gradually reduced, possibly as much as 20 percent, in 3 percent increments, based on how much income they make in excess of their income threshold.

Personal exemptions — those exemptions claimed for taxpayers and their dependents — similarly will be phased down in 2 percent increments for mass-affluent taxpayers.

Top earners. Americans in the very highest income brackets will take some tax lumps from the new law, says William McBride, chief economist for the Tax Foundation. Single taxpayers earning more than $400,000 and couples earning more than $450,000 will see their rates go up from 35 percent currently to 39.6 percent. Add that to the limits on deductions for high earners, and you’ve got a potent tax hit, he says.

“Together those two items basically raise the effective tax rate on high-income earners about 3 or 4 points,” McBride says.

Wealthy investors. For taxpayers in the higher tax brackets, long-term capital gains tax rates will rise from 15 percent to 20 percent. That means high-earning investors who make money from selling stocks, real estate and other investments they’ve owned for more than a year will pay more than they did in 2012.

That higher 20 percent rate will also apply to qualified dividends, Eisenberg says.

Large estates. Under the fiscal cliff fix, few people will pay federal estate taxes, since estates up to $5 million, which will be indexed annually for inflation, are exempt. But estates will now pay a 40 percent tax on amounts over $5 million, up from 35 percent last year.