Written on November 26, 2012
Have you heard about the “Fiscal Cliff?”
The Fiscal Cliff is the term being used to explain the automatic spending cuts and tax increases that will occur on January 1st and 2nd of 2013 if Congress does nothing.
Before I go too much into my summary, let me start by saying I don’t believe Congress and the President will do nothing to adjust for the situation.
Both Congress and the President appear to be very concerned about the “Fiscal Cliff,” and both appear to want to work together.
That being said, we will hear many scary things in the days leading up to the changes, and it is always good to be aware of what may happen if Congress and the President fail to act.
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Higher Taxes for All!
If nothing changes to the tax code, there will be higher taxes for all – not just the “rich.”
Last month, The Tax Policy Center issued a study summarizing just how the Fical Cliff would play out for different tax payers.
Here is a summary of their breakdown:
Household incomes around $20,113
- Average tax rate hike: 3.7 percentage points
- Average tax hike in dollars: $412
Household incomes around $64,484
- Average tax rate hike: 3.8 percentage points
- Average tax hike in dollars: $1,984
Household incomes around $108,266
- Average tax rate hike: 4.2 percentage points
- Average tax hike in dollars: $3,540
Household incomes around $506,210
- Average tax rate hike: 5.2 percentage points
- Average tax hike in dollars: $14,871
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Other Tax Changes That Are Set to Change:
Income tax rates: Rise to 15%, 28%, 31%, 36% and 39.6%, up from 10%, 15%, 25%, 28%, 33% and 35%.
Capital gains rate: Rises to 20% from 15% for most filers.
Qualified dividend rate: Rises to one’s top income tax rate, up from 15% for most filers.
PEP/Pease limitations: Restored. High-income households may not be able to take some itemized deductions and personal exemptions in full.
Child tax credit: Falls to $500 per child from $1,000. The refundable portion also reduced.
American Opportunity Tax Credit: Expires. The lesser value HOPE tax credit for college tuition is reinstated. Several smaller education tax benefits also expire.
Earned Income Tax Credit: Expansion of eligibility for the credit expires.
Marriage penalty relief: Expires. Effectively that means a low- or middle-income two-earner couple will owe more to the IRS than they would if they were single making the same income.
Estate tax: Parameters revert to pre-2001 levels. The exemption level falls to $1 million from $5 million; and the top tax rate on taxable estates rises to 55%, up from 35%.
AMT patch: Expired already for 2012. Income exempt from the Alternative Minimum Tax in 2012 — for which taxpayers will file returns next year — falls to $33,750 for individuals and $45,000 for married couples. That’s down from $50,600 and $78,750, respectively, if the exemption amounts had been adjusted for inflation.
As a result more than 30 million people will be hit by the tax, up from 4 million to date.
Payroll tax holiday: Expires. The Social Security tax rate reverts to 6.2%, up from 4.2%, on the first $110,100 in wages. Effectively, someone making $50,000 will pay another $1,000 in payroll taxes next year.
Unemployment benefits extension: The federal extension expires. That means workers who lose their jobs after July 1, 2012, will only receive up to 26 weeks in state unemployment benefits, down from as many as 99 weeks in state and federal benefits that had been available until recently.
By one estimate, more than 2 million claimants will lose their benefits by January.
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*The articles on this blog are for education and entertainment purposes only and should not be taken as financial or legal advice. See legal disclaimer for further information. If you would like more information on how something listed in any of my posts specifically affects you, please feel free to comment below, email me, or call me anytime.