US personal incomes were boosted by 2.6% in December, the biggest monthly increase since 2004, as high earners sought to beat a New Year tax rise.
December 2012 was marked by accelerated bonus and dividend payments, the US Commerce Department said.
Income tax cuts dating back to George W. Bush’s presidency were due to expire in the New Year as part of the “fiscal cliff” of tax rises and spending cuts.
Despite the boost to incomes, consumer spending rose only 0.2% in the month.
“Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates,” the Commerce Department’s Bureau of Economic Analysis said.
In the event, the tax rises went ahead only for individuals earning more than $400,000, as part of a last-minute deal negotiated between Republicans and Democrats in Congress to avert the fiscal cliff, with the top tax rate rising from 35% to just under 40%.
Capital gains tax also rose on January 1, 2013.
US personal incomes were boosted by 2.6 percent in December 2012, the biggest monthly increase since 2004, as high earners sought to beat a New Year tax rise
The 2.6% increase in incomes in December came on top of an unusually high 1% rise the month before.
Other factors also exaggerated the income increases in the two months, including lump-sum benefit payments handed out in December, and the loss of income for many in the New York area during October because of disruption from Storm Sandy.
Excluding all of these special factors, incomes rose 0.6% in November and just 0.4% in December – in line with the trend increase during the rest of the year.
Most of the windfall income was not spent, with the US personal savings rate increasing from 4.1% of income in November to 6.5% in December.
Indeed, the seasonally-adjusted growth in spending slowed noticeably in the run-up to Christmas, from 0.6% in November to 0.2% in December.
“Consumers finally realized about the tax increase so they pulled back a bit on their spending during the holiday season,” said Sam Bullard, senior economist at Wells Fargo.
Consumer spending is expected to remain weak in the New Year, owing to the impact of a rise in payroll taxes, also agreed as part of the fiscal cliff deal.
Personal incomes are also likely to experience a drag in January and over the coming months, reflecting the fact that most of the increase recorded in December was merely income that had been brought forwards.
US Congress last night finally passed a deal to avoid the so-called fiscal cliff, as critics attacked the Republican party for giving in and allowing tax hikes on wealthy Americans in return for minimal spending cuts.
President Barack Obama was in a triumphant mood as he addressed the nation after the vote on Capitol Hill, even winking at photographers before flying back to Hawaii to resume his vacation.
- Income tax rates: Extends decade-old tax cuts on incomes up to $400,000 for individuals, $450,000 for couples. Earnings above those amounts would be taxed at a rate of 39.6%, up from the current 35%. Extends Bill Clinton-era caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 andcouples earning more than $300,000.
- Estate tax: Estates would be taxed at a top rate of 40%, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012, such estates were subject to a top rate of 35%.
- Capital gains, dividends: Taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families would increase from 15% to 20%.
US Congress finally passed a deal to avoid the so-called fiscal cliff
- Alternative minimum tax: Permanently addresses the alternative minimum tax and indexes it for inflation to prevent nearly 30 million middle- and upper-middle income taxpayers from being hit with higher tax bills averaging almost $3,000. The tax was originally designed to ensure that the wealthy did not avoid owing taxes by using loopholes.
- Other tax changes: Extends for five years Obama-sought expansions of the child tax credit, earned income tax credit, and an up to $2,500 tax credit for college tuition. Also extends for one year accelerated “bonus” depreciation of business investments in new property and equipment, a tax credit for research and development costs and a tax credit for renewable energy such as wind-generated electricity.
- Unemployment benefits: Extends jobless benefits for the long-term unemployed for one year.
- Cuts in Medicare reimbursements to doctors: Blocks a 27% cut in Medicare payments to doctors for one year. The cut is the product of an obsolete 1997 budget formula.
- Social Security payroll tax cut: Allows a 2 percentage point cut in the payroll tax first enacted two years ago to lapse, which restores the payroll tax to 6.2%.
- Across-the-board cuts: Delays for two months $109 billion worth of across-the-board spending cuts set to start striking the Pentagon and domestic agencies this week. Cost of $24 billion is divided between spending cuts and new revenues from rules changes on converting traditional individual retirement accounts into Roth IRAs.
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The US Senate has decided to approve a deal to avert general tax hikes and spending cuts known as the “fiscal cliff”.
The bill, which raises taxes for the wealthy, came after lengthy talks between Vice-President Joe Biden and Senate Republicans.
The House is due to consider it later. Spending cuts have been delayed for two months to allow a wider agreement.
Congress missed the deadline to pass a bill, but few effects will be felt as Tuesday is a US public holiday.
Tax cuts approved during the presidency of George W. Bush formally expired at midnight.
Without approval in the House, huge tax rises for virtually all working Americans will kick in automatically.
Analysts warned that if the full effects of the fiscal cliff were allowed to take hold, the resulting reduction in consumer spending could spark a new recession.
The compromise deal reached on Monday seeks to avoid this by extending the tax cuts for Americans earning under $400,000 – up from the $250,000 level Democrats had originally sought.
A huge spending cut that would see $1.2 trillion shorn from the federal budget over 10 years has been deferred for two months, allowing Congress and the White House to reopen negotiations.
The Senate approved the compromise bill by 89-8.
The US Senate has approved a deal to avert general tax hikes and spending cuts known as the fiscal cliff
“If we do nothing, the threat of a recession is very real,” Senate Majority Leader Harry Reid, a Democrat, said.
“Passing this agreement does not mean negotiations halt, far from it.”
In addition to the income tax rates and spending cuts, the package includes:
• Rises in inheritance taxes from 35% to 40% after the first $5m for an individual and $10m for a couple
• Rises in capital taxes – affecting some investment income – of up to 20%, but less than the 39.6% that would prevail without a deal
• One-year extension for unemployment benefits, affecting two million people
• Five-year extension for tax credits that help poorer and middle-class families
President Barack Obama welcomed the Senate vote.
“Leaders from both parties in the Senate came together to reach an agreement that passed with overwhelming bipartisan support today that protects 98% of Americans and 97% of small business owners from a middle class tax hike,” he said in a statement.
“While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay.”
Senate Minority Leader Mitch McConnell, a Republican, said: “It took an imperfect solution to prevent our constituents from a very real financial pain, but in my view, it was worth the effort.”
Many of the Republicans who dominate the House dislike the deal and may stand on their principle.
Speaker John Boehner said the House would consider the deal but left open the possibility of amending the Senate bill – which would spark another round of legislation.
“Decisions about whether the House will seek to accept or promptly amend the measure will not be made until House members… have been able to review the legislation,” John Boehner and other House Republican leaders said in a statement.
The current House can legislate until Wednesday, when it is replaced by a new chamber chosen during last November’s election.
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