By Jill Schlesinger
Tribune Media Services
The fiscal cliff is now front and center in the national consciousness, and with Thanksgiving behind us, the time is right to help you further understand what is at stake for you and your pocketbook.
The cliff refers to the combination of tax increases (from the expiration of Bush-era tax cuts and President Obama’s temporary tax cuts) and across-the-board reductions in government spending, which resulted from the debt ceiling negotiations. Both are scheduled to trigger on January 2, 2013. The tax increases total $532 billion, while the spending cuts amount to $136 billion. Federal Reserve Chairman Ben Bernanke coined the term mainly because allowing the increases and cuts to trigger will equate to jumping off a financial cliff and likely sparking another recession.
That sounds bad, but what does that mean to you? If no deal occurs, it’s estimated that 80 to 90 percent of Americans would see some form of tax increase next year. The Tax Policy Center estimated that taxes would jump by an average of $3,500 per household, with middle-income households seeing an average increase of almost $2,000.
Here are some other effects of fiscal cliff-diving:
Long-term unemployment: Of the over 12 million unemployed Americans, 2.1 million currently receive federally backed emergency long-term unemployment benefits, which were enacted in 2008. For more than a year, the state-specific periods of eligibility for those benefits have been gradually reduced from a high of 99 weeks, to anywhere from 83 weeks to less than a year. These benefits are set to expire at year-end, adding to the hundreds of thousands of Americans who have exhausted their unemployment benefits.
Low-middle wage earners: These earners will lose a portion of the Earned Income Tax Credit (“EIC”), a refundable credit (meaning that even if your credit amount exceeds your tax liability, you don’t lose the excess and are entitled to receive any overage as a refund) for lower income working families and individuals.
Most analysts believe that the payroll tax cut will not be extended, which will affect 160 million working Americans. The “payroll tax holiday” was a 2 percent reduction of the employee contribution to Social Security and Medicare on the first $110,000 in wages (that is, the “FICA” line item on your pay stub). For a family earning $50,000, that will mean a tax hike of $1,000 per year.
Upper-middle wage earners: Both Republicans and Democrats have said that they do not want to see taxes rise for this group. Still, in addition to the payroll tax increase, this group faces higher tax brackets. For every dollar in taxable income above $70,700, the tax rate will rise to 28 percent, up from 25 percent. For over $142,700, the rate will rise to 31 percent from 28 percent. The current capital gains rate of 15 percent will increase to 20 percent, while the 15 percent dividend tax rate will equal income tax rates.
High wage earners (over $200,000 single, $250,000 married): The two top tax brackets are set to rise from 33 and 35 percent to 36 ($217,450-$388,350) and 39.6 percent (over $388,350) respectively. In addition to the capital gain and dividend rates, as of 2013, the Affordable Care Act will levy a new surtax of 3.8 percent on capital gains, pushing up the top capital gains rate to 23.8 percent for high income earners.
Finally, the estate tax is also set to increase. Right now, each tax payer is entitled to a tax credit that wipes out the estate tax due on the first $5,120,000 of an estate. The tax rate above the $5 million threshold is 35 percent. When the Bush tax cuts expire, the exemption will drop to $1 million and the tax rate will increase to 55 percent.
There is broad agreement that the full effect of the fiscal cliff would hurt the economy and cost jobs. That’s why Congress and the White House are trying to find a common ground solution that is a balanced approach, with both tax increases and significant spending cuts, but not so severe that the economy goes into a recession.
Jill Schlesinger, CFP, is the Editor-at-Large for www.CBSMoneyWatch.com. She covers the economy, markets, investing or anything else with a dollar sign on her podcast and blog, Jill on Money, as well as on television and radio. She welcomes comments and questions at askjill@moneywatch.com.
This was printed in the December 30, 2012 – January 12, 2013 Edition
