Fiscal Cliff Deal Details: How it Impacts you




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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