Fiscal Cliff Diving


This week, Congress finally stopped arguing and posturing long enough to pass some legislation to help the nation avoid the Fiscal Cliff that would plunge our economy into oblivion (or maybe not depending on who you ask). The fact that it took until we technically went over the cliff to get a deal done only makes sense to someone inside the beltway, but I digress. I’ve had several calls and questions about how all of this is going to affect us going forward so let’s review what happened.

Your taxes are going up, but not as much as they could have:

  • The payroll tax reduction was not extended, so the employee portion of payroll taxes will increase 2% to 6.2%.
  • The highest marginal tax rate increased to 39.6% (starts above $450,000 for married filing jointly, $400,000 for individuals), but the other rates stayed the same.
  • Personal Exemptions and Itemized Deductions are limited for high earners. The limitations start at $250,000 ($300,000 for married filing jointly).
  • The $1,000 child tax credit was extended for 5 years. It was scheduled to be reduced to $500 per child.
  • The estate tax went up to 40% from 35%, but the exclusion level remained at $5 million. Most expected the exclusion level to drop as low as $1 million and the rate to increase to up to 55%.
  • Alt Min Tax has been patched to automatically increase every year.
  • Capital Gains and Dividends will still be taxed at 15% for most Americans. High earners will pay 20%.
  • Marriage penalty relief was extended. (In case you aren’t familiar, that is the scenario where a couple would pay more in taxes filing together than if they were each filing as separate individuals.)
  • 50% Bonus Depreciation for qualified property was also extended for 2013.
  • The deduction for sales tax was extended for 2013. That’s a big deal for everyone in Texas, Florida, and the other states with no income tax.

Of course, we all know that the government’s budget problems are much, much larger than a small tax increase will solve. This sums it up pretty well.

In the next few weeks, expect to hear much more about this from Congress. The deep spending cuts scheduled to hit defense and entitlement spending were simply postponed for 2 months as part of this deal. We’re also on pace to hit the debt ceiling yet again in the next few weeks as well. In March, the resolution currently funding the government is going to expire as well. So Congress really only scratched the surface of the real issues at heart with this law. Expect much more fun in the weeks to come.

Bottom line: Most taxpayers come out ahead of where they would have if no compromise had been reached. What it means long term for our country will be heavily debated in the coming months.