Congressional Republicans have capitulated in the showdown over the payroll tax, handing Barack Obama an important victory going into election year.
John Boehner, the House Speaker, announced a full-scale retreat on Thursday evening after days of criticism from fellow Republicans, including Karl Rove and senator John McCain, who said his actions were hurting the party.
The decisive moment came when the Republican leader in the Senate, Mitch McConnell, withdrew his support for Boehner and sided with the White House, calling on Republicans in the House to support a bill to extend tax breaks.
As a result of McConnell's intervention, support for Boehner crumbled. As a face-saving exercise, Boehner claimed to have secured a concession - but it is no more than a minor procedural point.
About 160m Americans will now receive their tax breaks, worth an average of $20 a week, as usual in January and February.
It was the latest in a series of battles between the White House and Republicans in Congress this year that saw threats to close down the federal government. In all of the earlier ones, Obama came off second best, but not this time.
The victory for the White House will cheer a Democratic base which has watched with frustration as Obama caved in time and again to Republican pressure.
The bill is now expected to be passed by the House on Friday morning and signed into law by Obama before heading off on holiday. The president had delayed joining his family in Hawaii until the issue was resolved.
In a statement from the White House, Obama said: "This is good news, just in time for the holidays. This is the right thing to do to strengthen our families, grow our economy, and create new jobs. This is real money that will make a real difference in people's lives."
The bill was passed by the Senate on Saturday, with the backing of both Republicans and Democrats. The two-month extension is a compromise that allows them to negotiate after the holidays on a year-long deal.
Boehner, having initially agreed to back the bill, retreated on Sunday, faced with opposition by House members allied to the Tea Party movement. They demanded, in return for support for a one-year extension of the tax cuts, a series of concessions on spending cuts and on a controversial pipeline.
On Tuesday, House Republicans effectively voted to block the bill. The Wall Street Journal, normally a solid supporter of the Republicans, in a withering editorial, accused Boehner of helping Obama win re-election in November 2012.
As part of a face-saving exercise on Thursday evening Boehner claimed that, as a result of his actins, he had managed to secure from the Democratic leader in the Senate, Harry Reid, a promise to name members for a joint House-Senate conference to negotiate the year-long tax concessions.
"Senator Reid and I have reached an agreement that will ensure taxes do not increase for working families on January 1," Boehner said. Reid said he would have agreed to this anyway.
Boehner is unpopular with some of the rank-and-file members of Congress, particularly those leaning towards the Tea Party, and the tax debacle could bring closer a challenge to his leadership.
The tax breaks were introduced by Obama last year to help stimulate the US economy. If the bill was not passed by 31 December, American taxpayers face cuts in their pay of an average of $40 every two weeks and 1.3m people stand to lose unemployment benefit.
Earlier in the day, Obama, at a White House event organised to step up pressure on Boehner earlier on Thursday, described the standoff as "ridiculous", and paraded some of the 30,000 Americans who have written to the White House detailing the impact the tax rises would have on their lives. For some, the $40 is significant, meaning the loss of heating for almost half a week. For others, the impact is small but meaningful, from parents unable to take their children out for a pizza, to a man driving 200 miles a week to keep his father-in-law company in a nursing home.
McConnell's statement presented an even bigger setback for the House speaker. McConnell said working Americans "shouldn't face the uncertainty of a New Year's Day tax hike", and urged the House to pass the bill to avoid "any disruption in the payroll tax holiday".
The standoff with the House Republicans was an early Christmas gift for Obama. Democratic strategists decided months ago Obama would fight the next election portraying the Republicans as obstructionist. He took up this theme on Thursday, saying he would sign the tax bill immediately on receiving it from Congress, and the only thing stopping it was what he called a "faction" inside the Republican party.
"What's happening right now is exactly why people just get so frustrated with Washington. This is it: this is exactly why people get so frustrated," Obama said.
"This isn't a typical Democratic-versus-Republican issue. This is an issue where an overwhelming number of people in both parties agree. How can we not get that done? I mean, has this place become so dysfunctional that even when people agree to things we can't do it? It doesn't make any sense not to reach a deal."