[Updated following fiscal cliff deal] - Unfortunately it looks like the payroll tax credit will not be extended into 2013 under the new deal Congress and the Obama administration have reached. See how this will impact your 2013 take home pay. For the latest on other fiscal cliff impacts and negotiations see this article.
The Obama administration has confirmed its position regarding the fiscal cliff with the release of it’s latest report, The Middle-Class Tax Cuts’ Impact On Consumer Spending & Retailers. The report provides the administration’s viewpoint on the impact of rising taxes and forced cutbacks in government spending. Apart from confirming insights on what the administration supports, it also very informative to see what’s not in the report. Because tax breaks or credits that are not mentioned are almost certain to expire at the end of the year, like the big payroll tax credit holiday, low capital gain rates and higher estate tax exemptions.
Here’s some key points from the report (you can clearly see which ones the President/Democrats support)
- Extend Middle-Class and Small Business Tax Cuts. Taxes will go up for 98 percent of American families and 97% of small business with incomes of less than $250,000 if tax cuts expiring at the end of 2012 are not extended. President Obama and Congressional Democrats have already proposed to extend all the income tax cuts that benefit families who make less than $250,000 per year. However Republicans will only extend cuts if all tax payers are included
If Congress does not act on the President’s plan to extend tax cuts for the middle-class, it will be risking one of the key contributors to growth and jobs in our economy at the most important time of the year for the retail industry. If tax cuts are not extended the growth of real consumer spending could be cut by 1.7 percentage points in 2013, the growth of real GDP could slow by 1.4 percentage points and consumers could spend nearly $200 billion less than they otherwise would have in 2013 because of higher taxes.
- Continue AMT patch. If the Alternative Minimum Tax (AMT) is not extended, could cut the growth of real consumer spending by 1.7 percentage points in 2013 according to the President’s Council of Economic Advisers (CEA)
- Double and Extend Child Tax Credit. Increase tax credit to $1,000 per child, and make available credit to millions of working families that previously could not benefit from it (i.e. raise income qualification thresholds)
- Extending the lowest 10 percent tax bracket, which will provide middle-class couples with a tax cut of up to $890 next year.
- Marriage penalty relief, which reduces or eliminates marriage penalties for nearly 38 million couples.
- Extend American Opportunity Tax Credit (AOTC) that benefits 11 million middle-class families will no longer get help paying for college from the
- Continue small businesses tax deductions for new investments, who will otherwise only be able to claim immediate tax deductions for only $25,000, rather than $250,000 under current tax laws.
- There’s no mention of extending the Payroll Tax Credit holiday, which reduced workers contributions from 6.2% to 4.2%, and which is due to expire in 2013. [See this article for the potential impact on your household]
The report contains a lot more on the impacts of not extending the tax cuts (e.g. 114 million middle-class families will see their federal income taxes increase by an average of $1,600) and quotes from various analysts, banks and CEO’s. Worth a read if you want to get the Democrat perspective on this issue. It will be interesting to see the Republican response which should be out shortly.