Fiscal cliff deal would hit the rich - but it could have been worse

fiscal cliff rich and taxes
The House must still vote on the fiscal cliff deal, which hits the rich.

The rich will see a much bigger tax bill under the fiscal cliff deal, but even they will get some nice breaks.

Those making a million and up will pay $122,560 more in federal taxes, on average, according to new estimates by the Tax Policy Center. That means this group, which includes those bringing home many millions of dollars, will see a 5.7% drop in after-tax income.

Those with comparatively paltry incomes of between half a million and a million bucks will pay nearly $7,000 more in federal taxes, and see a 1.4% drop in after-tax income.

Less than 1% -- actually only 0.7% -- of tax filers overall will see a tax increase. Everyone else, including a wider swath of the middle class, will be virtually unaffected, though all wage earners will see a 2 point increase in the payroll tax that goes toward Social Security.

"It's profoundly a compromise," said Clint Stretch, a Washington tax expert. "We have a new definition of the middle class that seems to include virtually everybody."

The agreement, approved late Tuesday by the House, calls for the top rate on joint filers earning more than $450,000 to return to 39.6%, up from the 35% rate in place since the Bush tax cuts of 2001.

These folks will also pay a top rate on dividends and long-term capital gains of 20%, up from 15%.

Why I voted against the fiscal cliff deal
Why I voted against the fiscal cliff deal

Upper-income Americans will also enjoy fewer tax deductions. Married couples earning more than $300,000 will see their itemized deductions and personal exemption phase out. Couples earning more than $422,500 will not be able to take a personal exemption at all.

Also, estates of more than $5 million will be subject to a top tax rate of 40%, up from 35% now.

And this doesn't include two new taxes that will hit the rich to pay for President Obama's health reform package, including a 0.9% tax on earnings above $250,000 for couples and an additional 3.8% levy on investment income for wealthy filers.

Related: Fiscal Cliff: What's in the deal ... what could have been

But it could have been even worse for the rich.

For one thing, more people could have been classified as wealthy. Obama and Democratic policy leaders were originally looking to raise rates on filers with incomes above $250,000.

The higher threshold would helps the rich too since a smaller share of their income will be subject to the highest tax rate.

Another concession for the rich in the Senate deal is the rate on dividends. They will be subject to a top rate of only 20%, rather than 39.6%. This is especially important since a substantial portion of wealthy household's income comes from investments.

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