There is sure to be a lot of talk now about the fiscal cliff, a huge set of $500 billion dollar tax hikes and spending cuts that will go into effect if congress does nothing before the New Year. How will this confluence of economic events affect your bottom line?
If nothing is done, there will be about $1 trillion in expenses trimmed from the federal budget, including cuts to defense. Nearly 90% of Americans would have some form of an increase in tax. The 2 year temporary tax cut on social security (up to ~$2000/year for an individual) will expire as well as the Bush Tax Cuts of 2001-2003. In addition, the temporary AMT patch will expire along with the extension of unemployment benefits.
Lower income taxpayers will lose 2 valuable credits on their 2013 filings that were extended under president Obama in 2009. The Earned Income tax credit (EITC) and the Child Tax Credit were designed to lift Americans above the poverty line by giving them a credit for actually going out and working. Families who receive this credit tend to spend the money locally and quickly and this strengthens the local economy.
Higher income households would be hit with higher tax rates on ordinary income, capital gains, and dividends and those making more than $250,000/year will get hit with a 3.8% healthcare surtax on their unearned income. The marginal tax rate on ordinary income will also rise, and there is concern that that would potentially effect economic decisions.
In the very short term I hope President Obama can work with the lame duck congress to get an extension of the status quo, at least for a few months while the new legislators get settled. Then it is game on! If I were in Congress I sure would like to improve upon my 20% approval rating. I would like to be known as someone who could get things done for the betterment of the American people.
Click below to isten to morning guy Win Damon and I review the fiscal cliff on wnbp.com and FM 106.1 in the Newburyport Area
With more than 23 years of experience as a credentialed tax professional, Stu Steinberg, CPA, MBA brings a broad depth of knowledge to his work. He has worked with families and small business entrepreneurs for many years helping them plan more effectively. He can be reached at stu@erocktax.com or (781) 247-5569 anytime