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Home » Personal Finance News, Taxes

Fiscal Cliff Deal Details: How it Impacts you

Last updated by on 39 Comments

Unless you’ve been living under a rock for the last 4 months (not a bad place to be when compared to watching political news), you’ve probably been aware of the “fiscal cliff“.

And if you’ve turned on the TV, radio, or breathed in the last 24 hours, you are also aware that the drama has come to a close for now (until next month when we are scheduled to hit the debt ceiling and delayed spending cuts are scheduled to kick in). H.R. 8, the American Taxpayer Relief Act of 2012 (aka “the fiscal cliff deal”), has passed the House with a 257 to 167 vote. This, after it passed the Senate 89 – 8 one day earlier. President Obama just signed it in to law.

The legislation will have a noticeable financial impact on everyone. So just how did you – the beloved taxpayers who elect and pay the salaries of our fine members of Congress – make out with the fiscal cliff deal? Here are the details…

New Marginal Tax Rates

fiscal cliff deal detailsBecause Congress waited until January 1, 2013 to sign the bill, they technically voted for a tax cut (no coincidence) – as the Bush era tax cuts had expired earlier that day.

For individuals earning less than $400,000 and married filing jointly less than $450,000, your marginal tax rates will stay the same as they have been over the last few years (Bush-level).

For individuals earning more than $400,000 and married filing jointly more than $450,000, your marginal tax rates will return to Clinton-era rates. That is, they will increase from 35% to 39.6% on income above those levels. The income threshold for that level in the Clinton-era was $250,000.

These new tax rates will not need to be extended. They are the new level – until voted otherwise.

Dividends and Capital Gains Taxes

The tax on capital gains and dividends will be permanently set at 20% for those with income above the $450,000/$400,000 threshold. It will remain at 15% for everyone else.

For all those dividend investors and the wealthy, this is a huge win, as Clinton-era dividends were taxed at ordinary income (39.6%).

Social Security Taxes

The “payroll tax cut holiday” is over. This means that your Social Security (payroll) taxes will revert to 6.2% versus 4.2%. This was never meant to be a permanent cut – just a stimulus.

Tax Deductions

Two limits on tax exemptions and deductions for higher-income Americans will be brought back: the Personal Exemption Phaseout (PEP) and the itemized deduction limitation (Pease) will be set at $250,000 for singles and $300,000 for families. No income over those amounts? No change.

Tax Credits

The 2009 expansion of tax credits for lower income folks: the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit will be extended for five years. The Child Tax Credit was set to drop to $500, but it will stay at $1,000.

Medicare Tax

The new planned Obamacare medicare tax will stick for everyone earning over $200,000 (or $250,000 if filing jointly). These individuals will be required to pay an additional 3.8% tax (phased in) on the lesser of their modified adjusted gross income or net investment income.

Estate Tax

The estate tax will be set at 40% with a $5 million exemption for individual estates and $10 million for family estates. That threshold will be indexed to inflation.

AMT

The Alternative Minimum Tax will be permanently patched and indexed to inflation to avoid raising taxes on the middle-class. Finally!

What’s Next?

There is still a huge looming debt ceiling that will be approaching in late February that was not dealt with as part of the fiscal cliff deal. Also, all of those scheduled spending cuts were merely pushed back (sequestered) for two months, and without a deal, will still go in to effect. In other words, there’s still plenty of drama, market turmoil, and partisan politics ahead. This deal was literally the minimum that could have been done to avoid going off the cliff.

Fiscal Cliff Deal Discussion:

  • Were you happy with the fiscal cliff deal? Why or why not?
  • What would you have liked to see different?

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39 Comments »
  • Greg says:

    Regarding the Social Security Tax; I’m a state employee in Ohio and we don’t pay into social security (Ohio Public Employee Retirement System or OPERS pension program). Is this change something that will affect employers who don’t pay into the Social Security program?

  • Amy says:

    What about being able to deduct our property taxes? Before the vote, I read it was due to be eliminated, but can’t seem to find anything regarding this deduction now that the bill has passed.

  • Mukesh Sehgal says:

    I make 390K married filling jointly. I moved recently and have a lot of deductions (move, conferences, job expesnes,licenses for my buisness). Does that mean I can not deduct this from my tax? is this effective 2013 or 2012 tax year?

    • SD Lurker says:

      It is effective for tax year 2013 taxes.

    • SD Lurker says:

      The Fiscal cliff and all these other dramas concocted by the press and the DC pols are designed to distract the easily distracted public from the REAL issues.

      It seemed like a big deal ONLY because broadcast and cable news drummed it mercilessly 23/7. The Democrats will NOT reform entitlements even though they represent 70% of our expenditures and even though they know just as well as the Republicans that it has to be done or else they will just collapse under an overwhelming weight of the soaring debt.

      Why? Because they want to use it as a political club to bash the Republicans to retain their grip on power. Keeps people from focusing on the horrible state of the economic recovery.

      I recall Jack Nicholson’s famous line “the truth? You can’t handle the truth!” That’s the average voter whose head firmly placed in his rear where he doesn’t have to sort things out. He can just vote for the guy that tells him he can have more stuff and somebody else will pay for it! Well, hell, who wouldn’t?

      I wouldn’t because I know that’s the path to serfdom (for those who have read Hayek). It is also leads to immoral kleptocracy.

      The Fed will keep the interest rates low, and the printing presses busy expanding the money supply to juice the economy and allow the banks to recover the losses on all the bad paper they own – all at the expense of a weakening dollar.

      In reality, none of us are untouched by new taxes even if you are under the threshold because we are going to be assaulted with a whole variety of dishonest and stealthy subtaxes on a variety of things to fund Obamacare.

      The most deceitful being a tax on medical devices – the very technology that make healthcare more effective, productive and life saving! Irrational. Yet we can waste billions of dollars on fantasy green technology like Solindra – a near bankrupt company that was wisely rejected by the adults in the prior administration but whose statistics were embraced by cronies in the current administration.

      The famously advertised healthcare cost reduction will never materialize because it was ALWAYS phony math & assumptions. My HMO and my wife’s PPO premiums increased by about 20% for 2013 – an unprecedented increase in the thirty years we have worked.

      And don’t count on the promise of “keeping the healthcare plan you currently have” as Obamacare is carefully structured to incentivize employers to join the government pool to save their companies the cost of conventional plans – another cleverly crafted piece of dizinformation!

      Did anyone really believe that we could add 12-15 million more people to the healthcare roles and the cost would be reduced? If so, I have this bridge in Brooklyn for sale!

      The sad thing is that adding a HUGE new healthcare entitlement will just further depress the chances of economic growth and all those bright-eyed and bushy tailed young 20 something college grads are going to be sucking wind for years!

      Stop paying attention to the yokels on TV and educate yourself on what is really happening to the nation and your future.

      • Al W. says:

        I agree that people need to stop relying on singular sources for their information, the internet is readily available and filled with sources from both sides of the fence. After reading your whole post the only question I have is this: On a scale of 1-10, how much of your information comes from Rush Limbaugh?

      • Moose says:

        Well said. It is good to see someone who knows what is actually going on and has the courage to speak up. Please, run for elected office!

  • Ron Ablang says:

    As the head of a middle lower-class income family, I am relieved that us ‘poor’ people aren’t going to be taxed much worst than we have been.

    I’m slowly getting squeezed out of this country.

    • EZASITGETS says:

      RON, WHAT’S THE DIFFERENCE BETWEEN MIDDLE LOWER-CLASS AND UPPER LOWER- CLASS?

      • jd holiday says:

        $15000 on the high end….lower lower class tops out at $10000…middle lower class $10000 – $25000…upper lower class $25000 – $40000…lower middle class $40000 – $60000…middle middle class $60000 – $80000…upper middle class $80000 – $100000….thats for 4 people in ohio…i’m just sayin’……

  • jd holiday says:

    what about the “additional child tax credit”….is it gone or still available for tax year 2012

  • William @ Drop Dead Money says:

    Excellent summary! One of the best I’ve seen. Thanks! CNBC should offer you a job :)

  • Matt says:

    Taxing the rich more hurts the poor. Small businesses and poor people are better off when they can borrow more easily. They borrow rich people’s money. If you tax the rich more, they don’t spend less: they save and invest less. That means less money available for borrowing for small businesses and the middle class. Everyone is hurt by the fiscal cliff “deal.” Our country doesn’t understand simple economics.

    The real problem is spending. Democrats refuse to give up a penny in entitlement spending, Republicans refuse to give up a penny in military spending. Each side agrees not to touch the other’s take, and they shake hands and say “deal.” Our entitlement programs are intrinsically unsustainable for myriad economic reasons, and our military spending merely pisses off the rest of the world, which is then used to justify more military spending, and so on. It is now the Department of Preemptive Offense.

    Our solution to all of this spending is to borrow and print money (via the Fed). This can only go on for so long, as once our lenders figure out what’s going, they’ll either demand higher interest rates, which we can’t afford, or they’ll stop lending altogether. If the Fed becomes the only buyer of government bonds, then we won’t be able to import anything (“Made in China” look familiar?). We’ll have hyperinflation. Our country, and most of the world, are about to go off the REAL fiscal cliff, and that’s when interest rates rise. Hold on, everyone…

    • Al W. says:

      I am of the opinion that you are 100% correct but I feel you’ve missed the point. They aren’t looking for a good economy they are looking for a good future. In other words, they are deliberately putting our short term economy in a bad place in favor of putting our country a better place a decade or two down the road…

      they are allowing a higher tax rate on the middle class, raising taxes on the wealthy, and the republicans are asking for spending cuts also (though tax credits for nascar are slightly asinine in my opinion)…this means the fed is putting less money in (spending cuts) and the people will have less money (higher taxes)…all in all this means our economy will blow the next few years. They are balancing our debt which is a decent idea even if it hurts EVERYONE, which it most definitely will. though it is the poor that will feel it worst.

      • Matt says:

        They are doing the opposite of what you are saying: they are avoiding short term pain by sacrificing the long term. Instead of allowing wages to come down and unemployment to go up, the Fed is printing money to artificially keep wages and employment up. What would be good for the long term would be taking the pain now. Instead, we’re putting off cuts for “two months,” not cutting any meaningful spending, etc.

        The Fed is putting more money in, not less (and the fed has nothing to do with spending cuts so I don’t know what you mean by that). They aren’t balancing the debt at all! We spend more than we take in! Our debt is growing, we haven’t made any meaningful spending cuts, and so on.

        • Al W. says:

          yes, the fed has not made any spending cuts, i never said they did if you reread what i put…i said the republicans are calling for tax cuts (and in my opinion they will get them because of stubbornness) the combination of higher taxes and less spending by the gov will create an economic stall (harsher econ in the short term) but will, for the first time in a long time, put us in a surplus rather than a deficit (better in the long term). i say it will create a stall because there will be less money in the private sector (they are spending more on taxes) and there will be less money in the public sector (less spending by the gov). people tend to get nervous when there isn’t much spending going on and economies stall.

          • Matt says:

            The Fed has nothing to do at all with making spending cuts. The government just raised taxes on everyone, mainly rich people. Yes, there will be less money in the private sector. That is the opposite of sacrificing the short term for the long term.

            They didn’t make ANY meaningful spending cuts, and have agreed not to for at least two months (conveniently when the debt ceiling talks are due to come up). That’s also sacrificing the long-term for the short-term.

            Also, the government will not use this new revenue to actually pay back our debts, but rather it will just use the money to make unsustainable programs even bigger.

        • Al W. says:

          For some reason it won’t allow me to comment on your post below…

          I am pretty sure you aren’t reading what I am writing. I have said twice now that I agree the government has NOT decided on any spending cuts! and twice now you have repeated that statement…i have said that the the gov WILL be making cuts, you should google “boehner spending cuts”. he is the incredibly vocal leader of the house and he will get what he wants.

          how do you define short term? i define short term as in our lifetimes…long term is the next hundred years or so…less money in the economy is decidely not a good thing for the short term economy (our lifetime economy)…we’ve been using the keynesian economic model for the last 60ish years and doing a dramatic reversal of spending won’t be an easy transition in the slightest.

          • Matt says:

            You have said twice that the Fed is not doing any spending cuts. My point is that the Fed, aka the Federal Reserve, has nothing to do at all with spending cuts. Perhaps you are referring to the federal government, but in the context of fiscal and monetary policy, “the Fed” refers to the Federal Reserve.

            I define long term as sustainable, or forever. Do you want to leave your kids or grandkids with an unsustainable economic system that will blow up at some point? Also, we don’t get to choose when it blows up, and it’s going to blow up in our own faces. I’m in my 20s, and I’m certainly going to have to deal with the crash. My guess is that it’s within 3-5 years, maybe sooner.

        • Al W. says:

          Ok, yes I mis-spoke. I was referring to the federal government not the reserve.

          I would have to disagree with you that we can’t control the crash. It’s my argument that that is EXACTLY what they are doing. They are forcing a crash now by taking money out of the people’s hands, by cutting spending from the gov and thus forcing us into a controlled depression. Is it going to suck? Yes. Is it better than continuing to build our debt until the only possible recourse to get rid of it is a world war where we win and give our debt to the losers?…debatable.

          I am also in my twenties. I get to deal with the crash also. and I think 3-5 years is a good estimate.

          • Matt says:

            I can’t believe that you or anyone thinks they’re cutting spending now to avoid pain in the future. They just agreed NOT to cut any meaningful spending for two months (ya right). They haven’t cut any meaningful spending, nor will they. They will continue to monetize the debt. Why else would they keep interest rates low?

            How are they forcing a crash now? By keeping interest low through 2015? By borrowing more and spending more and taxing more? Are they using these new tax revenues to pay down our debt, or to keep unsustainable programs going and start new ones?

        • Al W. says:

          once again, cutting spending now is bad for us now (from the moment it happens until the time they stop; several years)…it is better in that theoretcially they are paying down the debt. you keep going back to your statement of “they’ll spend it on unsustainable programs”…i am not debating how they will f up AFTER they cut spending, i’m talking about how cutting spending is a bad idea in itself. but since we’re here anyway, what do you consider unsustainable?

          and once again, they will cause a crash by taxing more and spending less…i say “spending less” because of john boehner not because of anything currently enacted. if you would like to know why i believe what i believe please google ‘john boehner’. understand his influence (his ability to mess shit up) and his role in the fiscal cliff. also google ‘keynsian economics’. our country has operated (mostly) under keynsian theory for the past 60 years. raising taxes across the board and cutting spending would be a direct reversal of this policy.

          • Matt says:

            I know all too much about Keynesian economics. You’re right: that’s how we operate, and that’s why we are on the path to hell. Keynesians have everything backwards. If you go to my blog, I refute many Keynesian myths, and explain how an economy is supposed to work. Peter Schiff is great at explaining all of this (way better than me).

            As for Boehner cutting spending: he will do NOTHING about the Federal Reserve’s money printing and manipulation of interest rates. The government can borrow and spend ONLY BECAUSE of the Fed’s printing/lowering. Boehner claiming that he will enact spending cuts without referencing the Fed is a like a drug addict saying he will stop doing drugs, without mentioning the stash of heroin he has on hand. Why keep rates low and print money if you don’t want to borrow and spend?

            He, nor anyone else who has a chance of getting elected to a position of power, will ever cut any meaningful spending. He may reduce SS, Medicare/aid, etc. But that’s a drop in the bucket. You ever hear him say he wants to wean us off those programs completely? What about spending cuts for the military, for oil producers, farmers, veterans, research, education, mortgages, etc? What about contingent liabilities, loan guarantees, etc? It all needs to be cut. Boehner might have the right idea, but his idea of a spending cut is a joke.

        • Al W. says:

          alright, i’ll bite…how do i get to your blog? i can’t say i’m pleased with the theory of keynsian economics but it does seem to have good results (at the price of one hell of a debt).

          i’ll admit i don’t know enough about interest rates and their effect on…well…everything. i will research that since it seems to be your main concern.

          he (nor anyone else) can touch SS/ medicare/ medicaid because the elderly represent the vast majority of voters. Military is also probably safe. When it comes to cutting aid for farmers, by cutting all subsidies for farmers you are talking about raising the price of corn by a lot (a few other commodities will be hit but corn is the only one that matters). when corn goes up the price of all food containing corn syrup goes up; which is just about everything consumed by lower to middle income families…add to that the recent tax increase on everyone…bad news bears for everyone in that situation. but then again, the market might regulate itself…this could be a difference in economic theories.

          my personal opinion is that none of those will be touched, i think he will make a go at dismantling the USPS. I believe that there is a plan to get rid of them (for reasons i know not). they are an interesting story also.

        • Al W. says:

          yea i found it a little after i posted that. You have some good articles in there, i’ll post on those later i imagine. You weren’t kidding that was a long article.

          It’s logic is sound as far as I can tell…my only problem with it is the same as my problem with keynsian theory; how can you prove that the individuals are influencing the grander market?…in other words, his logic is sound (no debate there) but how can you determine that the low interest rates and a lul in consumer spending is what spurs entreprnuers into investment and R&D?…how can you determine that the competition for resources, when R&D conflicts with consumer spending, is unhealthy?

          many of his assumptions are based on the assumption that all consumers behave simliarly/ uniformly and i’m not sure that i’m cool with that assumption…but overall a very good article, i really liked his analysis of the great depression and the 1920’s.

          • Matt says:

            Thanks for the kind words!

            Individuals make up the broader market. They are the market. Any one individual may have a negligible effect, but collectively they make up the market. It’s economic democracy, and you vote with your dollars.

            If interest rates go lower, it’s because people are saving more (consuming less and/or producing more). This means that they will have more money in the future. This is precisely when it is easiest to make capital investments for future products, because long term capital projects are most sensitive to interest rates. In other words, interest rates coordinate the timing of production with consumer demand.

            R&D is only hurt by consumer spending, not vice versa. If consumers are spending all of their money (theoretically, of course) then there’s no need for R&D. All consumer demands are being met, and there’s nothing left over. Entrepreneurs and business will invest more heavily in R&D if there are more unsatisfied consumer demands.

            Woods does not assume that all consumers behave similarly. His point is that it’s the collective behavior of consumers that determine how resources are allocated. Businesses will always attempt to allocate capital in order to satisfy a consumer demand. Interest rates, in a real economy, let them know, in a general sense, whether consumers are satisfied with current products, or are saving for something better.

        • Al W. says:

          forgive my ignorance but which interest rates are you referring to? if you’re talking about interest rates on loans that individuals take out for houses/ cars ect…then wouldn’t that mean that people are in fact saving less? banks are competing for people’s business and keeping rates low. people taking loans out isn’t a measure in at all on their saving habits…but then again there are many types of interest. the interest on my savings account for instance, is next to nothing…

          R&D is a strange animal to get into really. for instance, a phone company or a computer company will ALWAYS have an R&D company because they must stay cutting edge. if consumer spending goes up that might just be an incentive for them to spend more on R&D…then again, if consumers spend less that could also be a decent reason to spend more on R&D…just depends on the company at that point. if a company isn’t fullfilling its consumers needs (and therefore failing financially) i imagine they would tend to do reserach to figure out what they’re doing wrong and fix themselves…yea…i’m not really sure what R&D has to do with anything since it is incredibly situational and, in my opinion, can’t be used to form an argument for the global/ local economy…

          when you say entreprenuers, what level and type of entreprenuer are you talking about? cause there is not a ‘standard’ entreprenuer. they come in different sizes (a few trumps compared to the millions of mom-and-pop-shops) and come in different flavors (inventors, investors, mom-and-pop, local services, ect)…

          that makes sense about woods’ points. thanks!

          • Matt says:

            I’m talking about interest rates across the board. The interest rates on savings accounts are dictated by interest rates on everything else, and vice versa. In a real economy, banks will lend based on the amount of capital they have, how financially stable the borrowers are, etc. Again, the collective lending behavior of the banks and the spending/saving behavior of consumers will set all interest rates. If people spend and borrow more, then they are less financially stable, and banks have less capital. That will drive interest rates, aka the price of money, higher. If people are saving more, then they are more financially stable, and banks will have more capital. That will drive the price of money lower.

            In our economy, the government sets interest rates via the Federal Reserve. I won’t get into it, but this is a bad idea.

            With R&D, you’re right: some industries need more than others. In reality, every business always needs some R&D. But again, in a general sense, less money will go into R&D if consumers are spending more. If consumers are happy with today’s products, then there’s less need for businesses to create better ones, and so they will allocate more capital to creating today’s products, not tomorrow’s.

            I’m talking about all entrepreneurs and businesses. Interest rates in a real economy will let entrepreneurs and businesses at all stages know the general mentality of consumers. If interest rates are high, then consumers are spending and borrowing a lot. If they’re spending and borrowing a lot, then they won’t have much money in the future. They’ll have less savings, and will have to pay back their debts. This would be a bad time to invest in a long term project, like a new factory, or building a new house. Conveniently, this is when it is hardest to finance a new factory, or a new house. Long term projects are most sensitive to interest rates. The high interest rate keeps entrepreneurs and businesses from making the poor decision to start a long term capital project.

            High interest rates incentivize consumers to save more, and for everyone to borrow less. Low interest rates do the opposite. It’s a self-correcting system that needs no czar like Ben Bernanke to tell us what to do. When the government artificially lowered interest rates in an attempt to get us out of the Fed-created NASDAQ bubble, people stupidly bought homes and construction companies stupidly built them. If not for the manipulation of interest rates by the government, then the housing bubble never would have happened.

        • Al W. says:

          all of that makes sense, thanks.

          I know a little about how the reserve plays from the research i did since starting to talk to you.

          I can’t help but wonder what the government and reserves role was before the great depression happened. i thought i read from that last article that the reserve didn’t play with the economy until after the depression. if that’s the case then could the free market be blamed for the crash in that instance? (i’m not attempting to de-base your argument with this, i’m genuinely interested at this point) i have hesitations about saying that the gov should just stay out of the economy entirely (cutting off all social programs, fixed interest rates, printing money, subsidies for farms and a bunch of other industries, tax breaks/ hikes for certain groups, ect)…i don’t know that cutting them off would fix anything at this point

          • Matt says:

            You’re asking great questions. The Federal Reserve increased the money supply by 55% in the years leading up to the Great Depression. That’s why it happened. People made stupid bets that they otherwise wouldn’t have made if not for cheap money. When the whole thing exploded, the free market, speculators, and greedy bankers got the blame. Sound familiar? Roosevelt came in with big government programs, and we’ve been growing debt and government ever since. Warren Harding was the last president to show some semblance of an understanding of basic, simple economics.

            You should read:

            Economics in One Lesson by Henry Hazlitt (1934)

            The Real Crash by Peter Schiff (2012)

            Hazlitt talks about the misconceptions of government manipulations of the economy, and the actual consequences. He wrote it in 1946, before Keynesians really took hold, making it that much more impressive.

            Schiff predicted the housing bubble/financial crisis (youtube “Peter Schiff was right” and enjoy). He explains how an economy and how governments are supposed to work, and why the US isn’t working.

        • Al W. says:

          While I can’t find any flaw in your logic, and I will cede you the floor on this issue, I must say that it is rarely true that something can be pointed to as a direct cause in situations this big. numbers and facts can lead to un-truths just as easily as truths.

        • Al W. says:

          http://www.cbsnews.com/8301-505145_162-57561841/where-is-the-housing-market-going-in-2013/

          ok…i see your point with keeping interest rates low being a bad policy now…45billion a month huh…good god…

  • Dee says:

    In my opinion it’s a minimum deal, passed by Republicans only because of pressure from the people of the US to avoid the fiscal cliff. It is very clear that opposition to Obama and all the “drama” around this debate has stemmed simply from racism toward Obama by traditional racist republicans. And it’s very sad to see in this day and age that the Republicans have moved so far backwards since Bush was in office. Racism is immaturity, and for grown men it’s sickening.

    • Al W. says:

      i agree with your minimum deal part…though i think it’s unclear on who is actually behind it since both sides seem to hate it…where in gods name did you get the racism thing? i haven’t heard anything about race being mentioned (with respect to obama) by anyone for the last few years… just because people disagree with obama does not make them racists.

  • Integrator says:

    For me, the biggest win was the dividend tax extensions. That’s a saving of close $3k per year in tax. I was surprised that this concession was extended, but Im not complaining!

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