Wealthy Breathe a Sigh of Relief Over 'Cliff' Deal
It could have been worse.
The tax increases imposed as part of the "fiscal cliff" deal will reduce the after-tax income of the top-earning Americans by more than $120,000 – or nearly 6 percent of their income.
But the tax increases voted through Congress over New Year's were lower than the earlier proposals by President Barack Obama, and they spare many high-earning Americans from any increase at all. What's more, those who make their money largely from investment income were spared the biggest increases.
Under Obama's earlier proposals, the average tax filer making $1 million or more would have had an average tax increase of about $180,000. Under the cliff deal, their tax increase averages about $120,000 – saving them $60,000 from what they might have paid under the Obama proposal.
The increases to top earners under the cliff deal are about 50 percent lower than the hikes proposed by Obama, according to economist Roberton Williams of the non-partisan Tax Policy Center. (Read more: The Five Largest Landowners in America)
The cliff deal calls for the top tax rate to go to 39.6 percent from 35 percent for individuals earning $400,000 or households earning $450,000 or more. Those earning between $250,000 to $400,000 – who had been targeted by Obama's proposed increases -- escape the tax hike.
The tax rate for capital gains will go to 20 percent from 15 percent, as the president proposed, but only for those above the $400,000 or $450,000 income thresholds.
But dividend earners were the big winner from the cliff deal. While Obama and many Democrats advocated for a rise in the rate for dividends to 39.6 percent, the rate inched only up to 20 percent. While the debate over the Buffett Rule and investment income roiled Washington in the months leading up to the cliff, investment income continues to hold a privileged place in the tax code – with a tax rate that's nearly half the rate for ordinary income.
Carried interest also remained largely untouched.
The estate tax got a minor bump up. Obama had proposed an estate tax of 45 percent on estates of $3.5 million or more (and some Democrats wanted an even higher rate), The cliff deal sets the rate at 40 percent on estates of $5 million or more. (Read more: The Do's and Don'ts of High-End Watch Collecting)
Of course, these tax rates may not hold for long. Democrats and some Republicans are still talking about the need for more revenue to tackle the debt problem.
But for now, wealthy taxpayers and investors are likely breathing a sigh of relief.