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By Jason Stipp and Jeremy Glaser | 12-31-2012 04:00 PM

Possible Cliff Compromise Just a First Step

Even if Congress can expediently pass Monday's compromise on tax rates, big hurdles on entitlements, the debt ceiling, and possible further tax-code revisions await, says Morningstar markets editor Jeremy Glaser.

Jason Stipp: I'm Jason Stipp for Morningstar.

Stocks rallied on Monday as Congress made progress on cobbling together a plan to avert the so-called fiscal cliff.

Here to talk about the early contours of that plan is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Glad to be here, Jason.

Stipp: So we did hear from Congress; they are making some progress toward reaching some kind of agreement to avert part of the fiscal cliff. What do some of the early contours of that plan look like? They are still, obviously, taking a look at that. Nothing has been passed yet as we film this; they're going back and forth, I'm sure. But what do we know so far?

Glaser: Well, I think that is an important point that we're not exactly sure what the deal is going to look like. But based on reports, we think we do have the basic idea.

And essentially, Congress is going to deal with the tax portion of the fiscal cliff and worry about the spending cuts and potential changes to entitlement and the debt ceiling later down the road.

So in terms of taxes, they're going to extend the current tax rates for most tax payers, except for those who are making a $400,000 or more individually or $450,000 as a family; they are going to see their rates go up to the Clinton-Era levels from before the Bush tax cuts.

Dividend and capital gains rates for those high earners will go from 15% to 20%, and will remain at parity for the rest of tax filers... The big question mark was if capital gains and dividends would be treated the same; it looks like that they will be.

The estate tax will go to a 40% rate for estates over $5 million. That's a little bit more than current rates, but still better than what would have happened if the fiscal cliff completely were to take place.

Some changes to the Alternative Minimum Tax, the AMT, fixes that potentially permanently--indexes it [to inflation]--so you don't have to worry about changing it every year so that more people don't get caught up in it.

[The deal includes] changes to Medicare reimbursement, so that doctors will get reimbursed at the same level--the so-called "doc fix"--that's in there.

Some programs to extend unemployment insurance for one to two years [were included in the deal]--it's not entirely clear on the deal yet--so that folks who are still looking for jobs will get that unemployment.

And the payroll tax cut that had been in place will expire.

There'll probably be a lot of other things in there, some things with the earned income tax credits, the child credits, other things could be extended for approximately five years. We have to see exactly what comes out of the deal, but definitely a lot of changes in the tax [code], trying to create a more permanent tax code, and one that fixes at least that part of the fiscal cliff.

Stipp: So I think that's a key point, as we understand the plan right now, that a lot of these fixes as far as where they are setting the tax rates are permanent. They are not meant to sunset at an exact time like the Bush-era tax cuts were, which later got extended. So does this mean that we really don't have to worry about the tax code? We've got it fixed now if they pass this, and that uncertainty is off the table?

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