The End of the Year is Coming and We Are Still Hanging on the Cliff– December 24, 2012 by Tracy Monroe

House Speaker John Boehner and President Obama insist that they’re not giving up on the currently stalled talks to avoid the fiscal cliff. President Obama laid the ground work Friday for a smaller deal to be reached after the Christmas holiday calling on Congress to find a way to extend the existing tax rates for families making less than $250,000 annually, let the rates expire for top earners and then negotiate on spending cuts and other fiscal issues.

Obama called for the plan after House Speaker Boehner scuttled his own proposal Thursday night to extend tax cuts for families earning less than $1 million a year, after realizing he didn’t have enough votes.

The next proposal to advance in Congress likely will come from the Senate, now that Boehner has asked leaders of the Senate to try their hand. The Senate returns to Washington on Thursday. There are three scenarios the Democrats in the Senate are considering: 1. Go over the cliff, 2. Push for a fall back measure or 3. Push for a broad deal, such as the deal that Obama offered last weekend.

1) Go Over the Cliff: A new Congress convenes on Jan. 3, 2013. In this scenario, the politics of the vote in the new year would be much easier because of the politics of the tax vote would be turned from voting to raise taxes to voting to cut taxes, since the tax cuts would have expired on Dec. 31.

2) Pass a Fall Back Measure: The Senate could take up the bill it already passed earlier this year to keep the tax cuts in place for the households with income below $250,000 and add the AMT fix, physician Medicare reimbursement fix and estate tax extension at the current rate. This would be harder for the Senate Democrats to pass because they will need seven or eight Republicans in the current Congress to cross party lines. They also want to be sure whatever they pass could also pass the House. Reid does not want to have Senate Democrats take a tough vote that will go nowhere in the House.

3) Pass a Broad Deal:The Senate would take the latest offer from President Obama to Boehner that has tax increases on household income over $400,000 and spending cuts, and turn it (or something close to it) into a piece of legislation. In this scenario the Senate Democrats would have to be sure they could get seven to eight Republican votes to pass it and that it would pass the House before going this route.

If nothing is done this year and we go over the fiscal cliff, the Bush era tax cuts will expire for everyone; the estate tax will go back to a $1 million exemption and a 55% tax; many other tax provisions will expire; the AMT exemption will be reduced for 2012; and the automatic spending cuts as a result of the sequestration will take effect on Jan. 3, 2013. Additionally, on Jan. 1, 2013, the 2% employee payroll tax holiday will end and the withholding for social security will return to 6.2%.

The IRS has warned lawmakers this week that if they don’t act to protect the middle class from the AMT by Dec. 31, up to 100 million taxpayers may not be able to file their 2012 taxes until late March. Payroll tax processors have said that if they don’t receive any further guidance from Washington, they’ll stick with the 2012 withholding tables.

We certainly hope Congress addresses these considerable issues in a responsible manner; it's getting harder to hang on.

Contact Tracy Monroe for more information.

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