What is the Fiscal Cliff ?
The fiscal cliff is a package of tax increases and spending cuts scheduled to take effect January 1, 2013. Unless Congress takes action, taxes will rise for most citizens and drastic cuts will be made to many governmental programs. For an average family, it could be a hard fall.
Which of the Expiring Benefits are Likely to Affect You?
Just about everyone will be affected in some way. The following is a list of some of the tax increases/expiring benefits scheduled to go into effect:
- Individual income tax rates: Earners in almost all tax brackets will pay higher income taxes (see table below).
|
Year |
Regular Marginal Tax Brackets (%) |
|||||
|
Currently |
10.0 |
15.0 |
25.0 |
28.0 |
33.0 |
35.0 |
|
Anticipated for 2013 |
15.0 |
15.0 |
28.0 |
31.0 |
36.0 |
39.6 |
- Capital gains and dividends tax rates: The tax rate for long-term capital gains could rise from 15% to 20%, or 23.8% for high-income taxpayers, which includes a 3.8 percent tax on net investment income that is part of the Affordable Care Act (aka Obamacare). As the provision to apply capital gain rates expires, dividends will be taxed at the same rates as ordinary income. Rates may soar from 15% to a maximum 39.6% or 43.4% for the wealthiest Americans.
- Payroll tax rate: For the past two years, the payroll FICA (Social Security) tax was reduced to 4.2% for employees. In 2013 it will increase to 6.2% on the first $113,700 in wages, up from the 2012 base of $110,100.
- Marriage tax: The standard deduction for a married couple filing a joint return will be 167% of the single filer s deduction rather than 200%.
- Child tax credit: The credit for each dependent child will be cut in half from $1000 per child to $500.
What s the $ effect?
The Congressional Budget Office ( CBO ) estimates that 20% of households with the lowest incomes could see their taxes rise by $412. For households with mid-level income between $39,791 and $64,484, an average increase of $1,984 could be expected. For the top 20% of households with income of $108,267 or above, the CBO estimates an average increase of $14,173. If you re in the top 1% of wage earners, with income above $506,210, the average increase in taxes could be about $120,500.
Congress has until the end of the year to take action, although the rhetoric is heating up and a deal is expected before the cliff appears January 1. If you have questions about the information presented above, please contact the expert listed below at PYA, (800) 270-9629.
