It is 6pm on the 31st of December as I start writing this piece, which with a certain cynical pride, I entitle this: 'The great nicotine/tax patch of 2012 - will it work?'

I live in a time zone 13 hours ahead of the east coast of the U.S. It is 5am in Washington, DC, right now. Soon the 535 voting members of the U.S. House of Representatives and Senate will be waking up, not in their warm beds in their home districts/states but in the US Capitol. They'll be getting up and going to their offices, ready to face the day and what I think will be a partial (at best) patch to prevent political suicide.

Now all of you out there, readers of Tax India International, have heard of the 'fiscal cliff' but if you were to be asked what it is, could you give a good answer? Fear not, even I will not try to explain it - especially when there is a far superior, multi-media gem available for one and all (except in countries where they block it) to see: I refer you to You Tube, the app you likely have on your smart phone. Query 'The Simpsons - The Fiscal Cliff' and you'll get the world's longest running animated 'sit com' (and deservedly so!!!) doing a one minute, fourteen seconds hilariously accurate explanation! Hey, I'm going to use this one in my annual 'US Tax Talk', this year!!!

So why am I writing this with pride? I had breakfast, this morning, with a media VIP who, two months ago, over a bottle of wine, heard me predict 'exactly' what is happening now in Washington. This morning, he asked: "How the bleep did you know?" Truth be told, I'm cynical enough to have taken a stab in the dark that things would happen this way. I didn't know. But why let on that I really didn't have the foggiest notion that this would be happening?

Obviously I'm going to be able to accurately tell you, tomorrow at this time, what exactly happens but my gut feeling is that some matters will be taken care of that will gather bi-partisan support - for instance, adjusting the AMT, (the US equivalent of your MAT) must be tweaked -now-because the IRS computer system cannot be up and properly running for the 2012 tax reporting year until this is done and this potential delay would cause havoc for the Internal Revenue Service. But tax rates, et al? Hey, the Congress has done it before and who's to say they won't do it again: enact something, sometime in 2013, retro-active to 1 January 2013? The big question to me is how much will this 'lame duck' Congress that runs not through 31 December but through 3 January be able to compromise vis a vis tax rates and budget cuts and how much more will be left over for the new Congress to attend to? Yeah, I see two tax bills on the horizon: one, likely to be announced tomorrow but enacted by 3 January; and another one sometime during 2013. Thus, I fearlessly predict that tomorrow's nicotine/tax patch will be a weak one that won't cure a thing. Enough writing for today - tomorrow's writing will cynically analyze the extent to which Congress prevents the Cinderella tax coach from turning into a foul tax pumpkin.....

Happy new year! I was up and on the telephone at 7:30am, this morning, talking with someone I am working with, completing gifting and the commensurate paperwork for the gift tax returns that will have to be done. Oh, the work still be finished in time, prior to the 'shrinking' of a $US5 million gift tax-free exclusion to a $US1 million exclusion at the stroke of midnight - it was 3:30pm in Los Angeles, on the 31st and a lot can be done in 8-1/2 hours! I asked if anything further had transpired - 'nothing, yet', I was told.

And then, at 9:55am, 1 January, China time, Deloitte's Tax News & Views reported that a deal's been made between the Republican Senate Minority Leader Mitch McConnell and Vice President Joe Biden. Here are the points agreed to:

* For tax year 2013, unless you are single and have adjusted gross income over $US 400,000 - or are married with AGI over $US 450,000, your individual income tax rates are not going to change. If you are those earning these amounts, you are going to be facing a new, highest tax rate of 39.6 percent. How this is going to be handled is still a question as one is not taxed upon adjusted gross income but has both deductions and exemptions reducing that amount to taxable income. Doesn't it sound like a penalty to be well off and married? Two well-to-do co-habitants could escape the 39.6 percent tax rate with $US 800,000 in income instead of only $US 450,000 if they are married???

* There's going to be a double whammy for long term capital gains taxation of the rich with the same AGI criteria: the LTCG rate goes up for them from 15 percent to 20 percent.

* There is now going to be a permanent patch to the Alternative Minimum Tax (the tax that nobody understands - unless you read my explanation of it in the forthcoming 'Larry's 2013 U.S. Tax Guide for Expats and Green Card Holders in User-Friendly English!"). This patch will automatically tweak the exemptions amounts, indexing it for inflation and thereby permanently keeping an important source of revenue for the IRS.

* Hoo Ha - it's 'triple whammy time': The personal exemption phase-out and the limitation on itemized deductions for (Pease), both of which were used in the past, are making their re-appearance for tax year 2013. While the AGI threshold for these have not yet been set, Deloitte conjures up a guess that it will kick in at $US 250,000 for PEP and $US 300,000 for Pease.

* Regarding the estate tax, the Democrats wanted a $US 3.5 million exemption with a 45 percent tax rate and the Republicans wanted a $US5 million exemption while maintaining the current, 35 percent tax rate. This one looks like pure, unadulterated compromise, with a $US 5 million exemption and a 40 percent estate tax rate.

O.K. So what doesn't this nicotine/tax patch cover?

How about the fact that all wage earners subject to social security tax deductions from their earned income will immediately find less take home pay for their next pay check, as the 2 percent 'temporary' deduction really becomes what it was intended to be: temporary!

And what about those mandatory federal spending cuts that theoretically amount to across the board 10 percent reductions - absolutely nothing is mentioned. Do these go into effect? What happens, now?

The Senate will vote on this....probably before midnight. The House of Representatives? That is indeed the question of the moment. What will this lame duck House do over the next two days? What does the future portend? Of the 234 Republicans elected to the House of Representatives on 6 November, only 15 of those districts voted for Obama for president. Thus, you are going to have for the next Congress, you've got a House majority of 219 members coming from 'pure' Republican districts with little inclination towards compromise.

It don't look good.

Hey, if there are any major changes after 3 January (US time), I'll amend this essay....but otherwise, let's get there right at the start of 2013. Happy New Year, everyone!