The Fiscal Cliff Deal – No Big Deal

The Fiscal Cliff Deal – No Big Deal

 Eileen St. Pierre, The Everyday Financial Planner

We all waited for weeks to see how it would end.  No matter how many questions we asked, we were never quite sure how it was going to play out.  No, it wasn’t the College Football National Championship or the season 3 premiere of Downton Abbey.  It was the fiscal cliff deal.  Like many of you, I could not help but feel disappointed and a little bit ashamed at the outcome.

There was no big deal.  We did not go over the cliff, but the hike is not over.  The deadline to deal with $109 billion in automatic spending cuts was delayed until March 1.  There was no raising of the nation’s debt ceiling, so Congress will have to deal with this issue probably by late February to keep the U.S. from defaulting on its debt.  But Congress did manage to pass some tax legislation:

  • The employee payroll tax will go back to 6.2%.  All workers will see a reduction in their paychecks right away.  For a worker earning $50,000 a year, that’s $20 a week or $1000 a year less to spend.  This money will go into Social Security.
  • Income tax rates for those individuals (families) earning more than $400,000 ($450,000) a year will rise from 35% to 39.6% in 2013.  Those earning less will see their income tax rates unchanged. 
  • The tax rate on dividends and capital gains will rise to 20% for those earning $400,000 or more.  Those earning less will see the rate unchanged at 15%.  Investment income may face additional taxation.  As part of the Health Care Reform Law, starting in 2013 investment income above $200,000 for individuals ($250,000 for families) will be hit with an additional 3.8% in taxes to help fund the law’s implementation. 
  • For those earning $250,000 ($300,000 for couples filing jointly), personal exemptions and itemized deductions will be phased out in 2013.
  • On the plus side, the Alternative Minimum Tax (AMT) was permanently indexed for inflation.  The AMT was created in 1982 to ensure wealthier taxpayers paid a certain minimum in taxes.  It’s confusing, but the AMT basically limits tax benefits from a variety of deductions.  However, it was never indexed for inflation exposing middle-class taxpayers.
  • The estate and gift tax rates will permanently rise from 35% to 40%.  The exemption amount will stay at $5 million and will be indexed to inflation.  Without the fix, the estate tax would have risen to 55% for estates above $1 million.
  • Higher levels of four family-friendly tax credits were maintained.  The child and dependent care credit was permanently extended (35% of eligible expenses up to $3,000 per child or $6,000 per family). The child tax credit (up to $1,000 per child), the Earned Income Credit ($5,891 maximum), and the American Opportunity Credit (up to $2,500 per year for 4 years) have been extended for another 5 years.
  • Congress approved a one year extension of federal unemployment insurance for those who have been out of work for more than 26 weeks.

The next three months should be interesting as Congress debates spending cuts and the debt ceiling issue.  There is one thing we can be assured of – they will wait until the last minute to decide anything.