Fiscal Cliff: How Does It Affect Me?

90% Will Pay More Taxes in 2013! How Can That Be?!

What taxes are going up?  How does this affect me? What can I do to save myself? What will happen to the country, which will in turn affect me, if we go over the “Fiscal Cliff”?

The “Fiscal Cliff” that we have heard so much about is a coined phrase that implies what happens if the Bush Tax Cuts expires and Obamacare is implemented as schedule in 2013. The individual and business results are staggering. Depending on whom you believe, the average 2013 tax increase per family is estimated to be between $1600 and $3500. If allowed to happen, what would it do (besides take $1600-$3500 from your pocket)?  A recession would almost assuredly occur…or depending on your definition, continue in a much more dramatic form with unemployment estimated at 9-11%.

If you believe that there is NO WAY this will happen, then stop reading now. It may not. I do not have a crystal ball. What I do know is that both sides have very differing philosophies, have agreed upon few things in the last four years, and if something was done, it was done in a “cloak-and-dagger” means with political goals, not those of its citizens. Unfortunately, that is politics. All I can tell you is that IF it is not decided, the following is some of the things that will happen.

What taxes will definitely go up unless Congress and the Obama act?

Here is a list of the main taxes that will increase:

• FICA tax in your paycheck will increase by 2%;
• Tax rate on ordinary income WILL go up because of the elimination of the 10% tax bracket and raising the tax rates on the other current tax brackets;
• Married couples will pay more by the reinstatement of the “marriage penalty” and a lower standard deduction;
• Child Tax Credit will be lowered from $1000 to $500;
• Capital Gains tax will increase from a maximum of 15% to 20%;
• Limitations on Itemized Deductions and Personal Exemptions would reappear on higher income individuals. (There is much talk about doing this on mortgage interest too, a large deduction for many millions of families, but is not a definite at this time);
• Qualified Dividends would be taxed at ordinary income rates (which will increase as stated above) up to 39.6% instead of the current maximum of 15%.
• The AMT, Alternative Minimum Tax, will cost an additional 33,000,000 or 36% of taxpayers more taxes unless it is fixed or an additional “patch” is applied as has been done for the last decade or so.

Obamacare Additions which will happen regardless of the above:

• Medical expense deductions, which up to now were allowed when they exceeded 7.5% of your AGI (Adjusted Gross Income), will now be allowed only when over 10% of your AGI, meaning that only the amount you spend AFTER you spend 10% of your wages will be deductible;
• High income individuals will pay an additional 3.8% tax on capital gains, interest, and dividends on top of the increased tax rate;
• Those without health insurance will be charged a tax. It begins at $95 per person/$285 per family, or 1% of your income (whichever is greater) and will increase to in 2016 to $2085 or 2.5% of income, again, whichever is greater.  There will be steep increases for years 2014 and 2015 to get to the $2085 number or 2.5% of income.

What can you do?

First, you need to call, write, or email your Washington, D.C. Representatives/Senators and give them your opinion, whatever that may be.  Though it is hard to believe, if enough people give their “two cents worth”, politicians do listen but only if they feel the pressure from people like you.

On a tax side, if the Bush Tax Cuts do not get extended or fixed (and the Obamacare will not be changed no matter what) then you need to push all possible income into 2012. If you are in a position to get a bonus, take it in 2012. If you will have capital gains or be receiving dividends in 2013, seriously consider getting them in 2012 if possible. If you are considering selling stock, do it in 2012 where the capital gains are lower so you can keep more of your money (though if it would be a loss, you may want to wait until 2013 unless you can use the loss to offset the gain). If you want to convert a traditional IRA into a Roth IRA, do it in 2012 because the ordinary income tax rate will be higher in 2013 because when you convert to a Roth IRA, it is taxable at the ordinary income rate, not to mention a possible additional 3.8% Obamacare tax on the amount in 2013, depending on your AGI.

If you believe that Congress and Obama will solve this and not allow the above to happen (except Obamacare taxes will happen no matter what), then ignore this whole newsletter and rest easy. But if it is not corrected, you know what to do!

Of course, always talk to your financial advisor when dealing with stocks, bonds, mutual funds, or any pensions.  Also, talk to your CPA when dealing with tax issues.  If you have no CPA, please feel free to call Daniel Accounting, LLC.

References:

Blankenship, Jim. What Obamacare Will Do to Your Taxes. Forbes Magazine. http://www.forbes.com/sites/advisor/2012/07/09/what-obamacare-will-do-to-your-taxes/. July 9, 2012.

Council on Foreign Relations. November 19, 2012. “What Is the Fiscal Cliff?”. http://www.cfr.org/economics/fiscal-cliff/p28757.

Franklin, Mary Beth. October 1, 2012. “Tax hit from fiscal cliff a real doozie”. Investment News. http://www.investmentnews.com/article/20121001/BLOG05/121009995