Fiscal Cliff Notes, Part 2
President Obama signed the new Fiscal Cliff bill (via autopen from Hawaii) so it is now law. Officially the bill is called The American Taxpayer Relief Act, though I have to admit I don't feel very relieved. The PDF is 157 pages long. How does it affect average citizens? I'll use myself as the basis for most comments - 'cuz I can't speak for anyone else, can I?
By the way, this isn't intended to be entirely comprehensive. I'm not a tax guy, and certainly don't want to be.
Top of the list is the two percent the government takes back after giving us a break for a few years. For the last couple years we've only paid 4.2% payroll tax on our first $113,700 earned (which is everything most of us earn). That was nice, but it's gone now, and the tax is back up to 6.2%. So if you're making $48,000 per year (or $4,000 per month) you'll see $80 less to bring home. That's a few meals out, so plan on more macaroni and cheese a few times a week.
This one was pretty much unavoidable, and we mentioned it in our e-book last October, which is still on Amazon™.
The tax penalty for marriage (which always baffled me) is not renewed. That means that most married couples filing jointly will continue to receive a standard deduction that is twice the amount for individuals. I actually used to know people that refused to get married because of the tax penalty. Now they don't have any excuse.
State and local taxes are still deductible. Texas doesn't have a state tax, and that's why I continue to live here.
Teachers continue to receive a $250 break on school supplies. I'm for this one, though it doesn't apply to me. My brother is a teacher, and he spends considerably more than that on supplies for his classes.
Tuition and education expenses are deductible if you're eligible. This doesn't apply to me right now, but it applies to my two youngest.
The Child Tax Credit is extended, so lower income parents may be able to claim as much as $1,000 for each child under age 17. I can't do this, but it is a nice thing for some people.
The Earned Income Tax Credit is also extended providing a credit for working Americans with low and moderate levels of income. I can't do this one either.
Federal unemployment insurance is extended for another year, helping people on unemployment for more than 26 weeks. This will help about two million Americans.
Homeowners who are forced into a short sale or foreclosure will not have to pay taxes on the amount of debt the lender "forgave" in the deal. This is a very good thing, and has always baffled me. Someone who is forced to lose their home isn't likely in a good position to pay taxes on the resulting debt difference. This one is only extended for a year, though.
The Alternative Minimum Tax will now be adjusted for inflation each year, which makes it more easily avoidable. This really doesn't apply to me.
The exemption for estate taxes will remain at $5.12 million (then indexed for inflation) instead of dropping down to an even million. I know this one doesn't sound like it applies, but an estate is everything owned by the deceased. It can add up pretty fast. The tax rate rises for this, though, from 35% to 40%.
People making more than $400,000 and couples making more than $450,000 will see a tax increase. The rest of us won't. They will pay 39.6% instead of 35% for income above the threshold. Capital gains taxes will increase for them also, from 15% to 20%. The rest of us will continue to pay 15% (or nothing for the lowest tax brackets).
There is a 3.8% tax on certain investments as part of the Affordable Care Act, though, and that isn't addressed by the Fiscal Cliff deal.
Those making more than $422,500 will not qualify for personal exemptions on their taxes. If you make more than $250,000 (or married with $300,000 income) your personal exemptions and deductions are limited.
The Fiscal Cliff bill didn't address The Sequester, which are the spending cuts for defense. Instead they pushed the issue out until the end of February. I'm a little amazed at that. February? C'mon, people. February will be over before you can get your Congressional seat warm.
They did pass a measure easing the conversion of traditional IRAs to Roth IRAs, removing the age restriction for doing so. This will hurt us in the long run, though it might bring in some short-term revenue. I'd like to do it, but have to think about the tax implications.
They also didn't address the debt ceiling, which is an issue that will come crashing down on their collective heads very, very soon. I expect it will become the next buzz word in the news to replace Fiscal Cliff.
Of course, there are the wacky tax breaks in the bill, some of which were listed in my blog post from yesterday.
So, Fiscal Cliff avoided? I don't think so. It has mostly been a political football and talking points in the news. The real issues remain poised over the heads of the citizens of this country. We're a country in massive debt, and we're not cutting our spending and can't afford to pay it off.
Government spending was not reduced. The national debt will increase by trillions of dollars (and I shudder when I type trillions).
As I get closer and closer to my golden years I still wonder about Social Security and Medicare. They need to be reformed, and nobody wants people to suffer during the reformation. Those issues weren't addressed either.
So what we now face is tumbling down the cliff, or dropping off one cliff after another, whichever metaphor you prefer. Either way, the American people will be bruised and battered for decades to come.
Sources
http://economy.money.cnn.com/2013/01/02/taxes-fiscal-cliff/
http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/31/your-fiscal-cliff-deal-cheat-sheet/
http://www.washingtonpost.com/business/economy/proposed-fiscal-cliff-deal-falls-short-under-three-economic-theories/2013/01/01/ca1aa2da-5456-11e2-bf3e-76c0a789346f_story.html
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