Fiscal Cliff? No Way...

Fiscal cliff? Now way, here is what will likely happen.   A last minute deal will be negotiated by Senate Minority Leader Mitch McConnell (R-Ky.) and Vice President Joe Biden.  It will achieve almost $800 billion in revenue over the next decade. However, some of the revenue will be spent to pay for extensions of tax credits and other stimulative policies.  In theory about $600 billion in debt reduction may be accomplished over the next ten years.  Expect the Bush-era tax cuts to be extended permanently for individuals at $400,000 and joint filers at $450,000. The top rate on ordinary income will go back to 39.6 percent and raise an estimated $370 billion in revenue over 10 years. Expect the same thresholds to be applied for capital gains and dividends, with the top rates in that case going up to 20 percent.  (The rate on dividends was set to return to 39.6 percent.) Both sides will argue a bit longer on what and when cuts will take place.

In the mean time, tax benefits will decrease for high-income earners, with respect to their personal exemptions and itemized deductions. Personal exemption phase-out would be capped at $375,000 for individual filers and $425,000 for joint filers. The limitation on itemized deductions would be set at $250,000 and $300,000 respectively. This means the tax bill paid by those taking the exemptions and deductions goes up. These provisions could raise an estimated $185 billion over 10 years.

Expect a five-year extension of stimulative tax policies, such as the Earned Income Tax Credit, the Child Tax Credit and the college credit expansions. The policies will lapse in years five through 10.There may also be a one-year extension of the 50 percent bonus depreciation provision introduced in the American Recovery Act, which enables small businesses to deduct up to $250,000 of the cost of machinery and other equipment.

In the end, expect no jumping off any cliff and in Washington it will be business as usual.